EUR/USD: How to trade Nonfarm Payrolls, five scenarios, levels to watch

Third consecutive disappointment or a big rebound? Nonfarm Payrolls – aka "the king of forex indicators" always rocks markets. Economists expect an increase of 425,000 in October after a meager rise of 194,000 in September, and the dollar hinges on its outcome. 

Quick Background

This NFP is even more important after tapering the bond-buying scheme, Federal Reserve Chair Jerome Powell has added emphasis on employment as the key to raising interest rates. Markets were eager to know if their assumption of a hike in June 2022 is correct, and Powell pushed them to look at jobs data. 

A strong figure would boost the dollar while a weak one would weigh on it – a straightforward trade. What about wages? Average Hourly Earnings are set to accelerate to 4.8% YoY in October vs. 4.6% in September. However, it would take a wild surprise in earnings to divert attention away from the headline NFP.

After two disappointments, a big beat or a third shortfall? 

Source: FXStreet

Sentiment and Levels

There is a substantial bias in favor of EUR/USD bears. The Fed not only began tapering but also left the door open to accelerate it and finish the process of money-printing earlier. Its statement also showed less conviction that inflation is transitory. Overall, the Fed is set to raise rates in 2022, and the difference is between moving in the spring or the summer. 

The European Central Bank is a different story. Apart from having lower inflation – 4% YoY vs. 5.4% in the US – it will not raise rates next year. At the same time that Powell was addressing the press, ECB President Christine Lagarde spoke on television and committed to keeping rates depressed through 2022. 

That has pushed EUR/USD down, and the pressure is likely to continue through the end of the week. 

Levels to watch from top to bottom: 1.1690, 1.1640, 1.1615 (weekly top and double-top), 1.1565 (swing low earlier in the week), 1.1535 (late October trough), 1.1525 (October low), 1.15 and 1.1450. 

Five scenarios for EUR/USD

The economic calendar is pointing to an increase of 425,000 jobs and leading indicators were mixed. While ADP´s private-sector jobs report beat expectations with 571,000, the employment components of the Purchasing Managers' Indexes came out marginally below estimates.

1. Within expectations: Recent volatility in NFP figures means that any figure between 350,000 and 500,000 could be considered as meeting estimates. As the bias is in favor of the dollar, EUR/USD would likely decline, but likely remain within the broad trading range.
2. Above expectations: An increase of between 500,000 and 650,000 would be considered a significant beat, and it would also compensate for some of the previous disappointments. In such a  case, EUR/USD could lose a support line.
3. Well above expectations: If the NFP exceeds 650,000, it would already be a blowout that would cause markets to aggressively reprice a rate hike from the Fed. EUR/USD could tumble below two support lines. 
4. Below expectations: Another rise of 200,000 to 350,000 positions would be disappointing, representing a return to the pre-pandemic "normal." It would likely push EUR/USD higher, but probably be insufficient to cause a break above resistance. 
5. Well below expectations: A nearly unthinkable increase of fewer than 200,000 positions would already be a worrying sign for the economy and the Fed, causing a pause in rate hike expectations. In such a case, EUR/USD would likely pierce one line of resistance. 

Conclusion

October's Nonfarm Payrolls has become more important after the Fed's tapering event and the dollar is ready to extend its gains – yet it depends on the outcome.