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The first Friday of the month brings the Non-Farm Payrolls report and this time, it feeds into the highly-anticipated Jackson Hole Symposium. While a balance sheet reduction in September is “baked into the cake”, the fate of the next rate is quite unclear. Fed officials are not that eager to provide hints. The jobs report could lead the way. And once again, it’s all about the wages.

EUR/USD had recently enjoyed a huge run, even topping 1.19 at one point. There were good reasons for the rise: politics look more stable in Europe, the ECB is nearing the exits and more. See the 5 reasons for the EUR/USD rise.

However, many analysts see the most recent rally of the pair as overstretched with a period of consolidation or even a significant correction before the rally can resume. All in all, the current bias is more neutral, allowing for a real reaction to the news.

Expectations stand at a gain of 181K jobs after 222K last time. The unemployment rate is predicted to fall from 4.4% to 4.3%. And the most important figure is wages, as always.

In the report for June, wages rose 0.2% m/m and 2.5% y/y, basically stuck. The ongoing rise in employment does not push wages higher, something that puzzles the Fed and many others.

This time, expectations stand at a monthly rise of 0.3%.

3 scenarios for the EUR/USD reaction

The initial reaction could come from the headline change in jobs, but this will probably only be a distraction. The real reaction lies within the realm of annual wage growth.

  1. Wage growth stays at 2.5% or 2.6% y/y: This has been the average in the past year and will not come as a shock. Such an outcome will allow for more consolidation of the pair, that will eventually be followed by a resumption of the long-term uptrend.
  2. Wage growth falls to 2.4% or less: This will show that the labor market is far from overheating, dampening expectations for a rate hike in December. The dollar will likely slide across the board, allowing for the EUR/USD to resume.
  3. Wage growth accelerates to 2.7% or beyond: A pick up in wage growth will be a welcome sign that job gains are triggering inflation, raising prospects for a third rate hike in 2017 and a firmer message by the Fed in the Jackson Hole Symposium.

What do you think?

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