Will Weak Labor Data Force the Fed's Hand and Sink the U.S. Dollar?

The U.S. Dollar faces a pivotal moment as the nonfarm payrolls (NFP) data for August is set to be released on Friday, September 5, 2025, at 12:30 GMT. Economists expect the U.S. nonfarm payrolls to increase by 75,000 in August, marginally higher than the 73,000 reported in July. The unemployment rate is anticipated to rise to 4.3% in August, up from 4.2% in the previous month. Additionally, average hourly earnings (AHE) are projected to grow by 3.7% year-over-year, a slight decline from the 3.9% recorded in July. These figures reflect a continued moderation in hiring momentum and wage inflation, key factors influencing the U.S. Federal Reserve’s interest rate decisions.

The upcoming NFP report is of heightened significance amid a backdrop of weaker labor market data, including the U.S. ISM Manufacturing PMI, which rose to 48.7 in August but fell short of expectations. The JOLTS report also showed a sharp decline in job openings to a ten-month low of 7.181 million in July, well below the anticipated 7.4 million. Furthermore, the Automatic Data Processing (ADP) private-sector payrolls data revealed a disappointing increase of only 54,000 in August, far below the forecasted 95,000. These data points suggest a softening labor market, increasing speculation that the Fed may consider an aggressive 50 basis points rate cut at its September 16-17 policy meeting.

Federal Reserve Chair Jerome Powell has already signaled concerns about the labor market during his Jackson Hole speech, highlighting rising downside risks to employment and a slowdown in consumer spending. While a 25-basis points rate cut is widely anticipated, the growing body of disappointing labor data has fueled expectations for a larger cut. A reading below 50,000 in the NFP report, coupled with a higher unemployment rate, could intensify the case for a 50 bps reduction, potentially triggering a sell-off in the U.S. Dollar. Conversely, a strong reading above 100,000 could delay aggressive easing and limit downward pressure on the USD.

The U.S. Dollar has already shown signs of volatility in anticipation of the NFP release, with the EUR/USD pair fluctuating within a defined range around key technical levels. Analysts suggest that a break above the 1.1700 level could extend the uptrend, while a decline below 1.1600 might see further weakness. Against major currencies, the U.S. Dollar has posted varied performance, with the most notable strength observed against the Japanese Yen. This dynamic is likely to intensify following the NFP release, particularly if the data diverges significantly from market expectations.

In addition to its impact on the U.S. Dollar, the NFP report is expected to influence broader financial markets, including gold prices. A weaker-than-expected jobs report could provide a tailwind for gold as investors seek safe-haven assets amid heightened uncertainty. Conversely, stronger data could lead to a sharp pullback in gold prices, reinforcing a shift toward risk-on assets. The labor market’s performance remains a key barometer for the U.S. economy and will play a decisive role in shaping monetary policy and currency valuations in the near term.

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[1] NFP set to show continued moderated hiring in August (https://www.fxstreet.com/news/nonfarm-payrolls-set-to-rise-by-75k-in-august-amid-us-labor-market-concerns-202509050500)

[2] US private payrolls miss expectations in August - Yahoo Finance (https://finance.yahoo.com/news/us-private-payrolls-miss-expectations-122936780.html)

[3] Nonfarm Payrolls set to rise by 75K in August amid US ... (https://www.mitrade.com/insights/news/live-news/article-6-1097868-20250905)