US payrolls data to test dollar rally with 88,000-job forecast

The dollar hovered near a two-month high Friday as traders awaited US nonfarm payrolls data that could determine whether the Federal Reserve's next move is a rate rise, with consensus forecasts pointing to 88,000 jobs added in May.

"Labor market stability and increased inflation pressures could compel the Federal Reserve to highlight the building prospect of interest-rate rises," Derek Halpenny, head of research at MUFG Bank, said in a note.

The unemployment rate is expected to hold at 4.3%, according to a Wall Street Journal survey of economists. The data follows a JOLTS report Tuesday that showed job openings surged 731,000 to 7.618 million in April, the highest level since May 2024, while hiring fell 419,000 to 5.116 million. Private payrolls rose 122,000 in May, ADP data showed Wednesday, above the 117,000 consensus estimate.

A strong print would reinforce expectations that the Fed will keep its benchmark rate in the 3.50%-3.75% range into next year while monitoring inflation fallout from the Middle East conflict, with some economists flagging the prospect of rate rises if price pressures persist. "The appetite for dollar selling on a weak report is probably less than appetite for buying on a stronger report," Halpenny said.

The DXY dollar index edged down 0.2% to 99.213 in early European trading, though it remained close to Wednesday's near two-month high of 99.552. The euro rose 0.3% to $1.1638, while the dollar held near 160 yen, a level that has prompted stepped-up verbal intervention from Japanese officials. Prime Minister Sanae Takaichi said the country aims to defend the yen's credibility by strengthening Japan's economy, while Finance Minister Satsuki Katayama said authorities will respond appropriately in the FX market as needed.

Commerzbank's Michael Pfister said the labor market appears to be stabilizing after months of weak jobs growth, and Friday's data could exceed expectations with payrolls rising as much as 100,000. "The key factor for the dollar is the extent to which the figures strengthen market expectations of further interest rate hikes," Pfister said.

Not all economists are convinced the labor market is regaining momentum. Samuel Tombs, chief US economist at Pantheon Macroeconomics, cautioned that indicators with a better track record of forecasting payrolls — including the hiring intentions indexes of the NFIB and regional Federal Reserve surveys — have weakened in recent months. "Evidence that the labor market is regaining momentum remains unconvincing," Tombs said.

The April nonfarm payrolls report showed 115,000 jobs added, while the three-month average stands at roughly 100,000, above the estimated 85,000 monthly breakeven rate the Atlanta Fed pegs for stable unemployment. The last time job openings exceeded 7.6 million was in May 2024, a period when the Fed was holding rates at a then-23-year high before beginning its easing cycle in September of that year. The May data, due at 1230 GMT, will provide the clearest signal yet on whether the labor market is firming after wobbling in 2025 under the weight of tariff-related uncertainty.

For the euro, the stakes are equally high. ING's Francesco Pesole said the single currency risks falling below $1.16 barring tangible progress in US-Iran negotiations. Stronger-than-expected payrolls could prompt markets to fully price a US rate rise this year, further widening short-term US-eurozone rate differentials that have returned as a more prominent driver for euro-dollar. The European Central Bank meets Thursday, with markets pricing a 25-basis-point rate rise that could modestly support the euro if accompanied by hawkish guidance.

The Federal Reserve's next policy meeting is scheduled for June 16-17, where the central bank is expected to hold rates steady. OIS markets currently price a roughly 30% probability of a rate rise by December, according to LSEG data. Inflation increased at its fastest pace in three years in April, the government reported last week, adding pressure on the Fed to respond if the labor market continues to tighten.

This article is for informational purposes only and does not constitute investment advice.