The forthcoming non-farm payroll (NFP) data could present challenges for the Federal Reserve as it deliberates on potential interest rate cutsWhile there’s an increasing potential for gold prices to rise, clarity regarding a bullish breakout remains elusiveThe potential impact of tonight's NFP figures on the dollar is a focal point of speculation.

Scheduled for release at 21:30 on Friday, the U.SBureau of Labor Statistics will disclose the NFP figures from December of the previous yearEmployers in the United States are anticipated to have added a considerable number of jobs in December, with the unemployment rate expected to remain unchangedThis indicates that, contrary to broader fears, the U.Slabor market has not experienced a significant slowdown as initially anticipated.

According to a median estimate from a Bloomberg economist survey, the NFP is projected to show an increase of approximately 165,000 jobs. This figure represents a decline from November's 227,000, further fueling the narrative that the labor market is gradually cooling.

The forthcoming labor statistics will likely reinforce the Federal Reserve's shifting focus back toward inflation concerns. Last year, in a bid to avert a rapid deterioration of the labor market, the Fed cut interest rates by a full percentage point

Post these rate cuts, Federal Reserve Chairman Jerome Powell indicated that as long as the job market remains robust, the Fed can afford to adopt a cautious stance regarding additional rate reductions.

In a data forecast on January 6, Bank of America economists Shruti Mishra and Aditya Bhave commented, “A pause on rate cuts in January seems to be the base case for the FedWe believe that if the labor market shows no signs of cooling, the rate cutting cycle could conclude.”

While job growth predictions for this NFP report range from 100,000 to 268,000 new jobs, if the report falls in line with median estimates, it would imply that the U.Seconomy robustly added 2.1 million jobs in 2024. This number, while lower than the 3 million jobs added in 2023, still exceeds 2 million jobs created in 2019.

However, on the surface, some signs of weakness have emerged within the job market

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Monthly hiring has frequently been concentrated in a select few sectors, and the unemployment rate has been risingMoreover, job seekers are finding it increasingly challenging to secure new employment, with some firms announcing that recruitment in the U.Swill be at its lowest in nearly a decade in 2024.

Economists Anna Wong and Estelle Ou from Bloomberg stated in their January 9 forecast report, “December’s non-farm figures could be robust, signaling an encouraging sign for labor market improvementNevertheless, we remain wary of concluding that the labor market is rebounding.”

Analysts have been closely monitoring the unemployment rate, especially after early signals of rising unemployment triggered a widely recognized recession indicator

Predicted unemployment figures for December stand at 4.2%, consistent with November's rate, yet up from 3.7% at the beginning of the yearAverage hourly earnings are expected to show a slight deceleration compared to the previous month.

Citigroup economists Veronica Clark and Andrew Hollenhorst noted in a report on January 6, “The unemployment rate remains the most significant aspect of the monthly employment data. We anticipate that if the unemployment rate rises to above 4.5% in the upcoming months, there will be substantial adjustments to rate cut expectations from the Federal Reserve this year.”

The employment report comprises two surveys: one targeting businesses and the other focused on households

The report due on Friday will include annual revisions in the household survey, which offers reference for statistics like unemployment and labor force participation rates.

Andrew Husby, senior U.Seconomist from BNP Paribas, mentioned in a report on January 3, “This process typically results in minimal adjustments to the unemployment rate, and we expect this to be the case this time as well.”

Next month’s report will include benchmark revisions on the business survey, along with new seasonal factors that often have a more pronounced impact on the overall situation of the labor marketPreliminary estimates released last August suggested that in the 12 months ending March 2024, the U.Sadded 818,000 fewer jobs than initially reported

Following this, the Philadelphia Fed’s estimates indicate that the trend of employment weakness may continue into the second quarter of 2024.

Traders see the upcoming employment data as a test for the market’s “hawkish pricing” by the Fed, pointing out that the trajectory of the U.STreasury market on Thursday hinted that despite strong employment figures, market expectations remain fairly balancedPrior to the data release, several Federal Reserve officials affirmed that rates will likely remain steady for a prolonged period unless there’s clear evidence of inflation cooling.

Strategists from BMO Capital Markets noted, “Such deviations would enable the Treasury market to respond with stronger buying action in the event of downside surprises, instead of any selling pressure that may arise from strong report outcomes.”

According to Andrew Husby from BNP Paribas Securities, “For the Fed to consider cutting rates this month—given a non-farm growth significantly below 100,000 and an unemployment rate above 4.3%—there would have to be considerable miss in key metrics rather than maintaining the current pricing structure.” He anticipates that the non-farm employment growth rates for 2023-2024 may be downwardly revised in next month’s report but should still reflect a resilient job market.

Oscar Munoz and Gennadiy Goldberg from TD Securities noted, “Despite losing growth momentum, we still expect employment numbers to stabilize

We also anticipate that the unemployment rate will hold steady at 4.2%, and wage growth may lose momentum due to favorable seasonal factors.”

They also pointed out that a labor market report that is mild yet still robust is unlikely to result in strong market reactions.

A survey conducted by 22V Research showed that the majority of investors are paying closer attention to employment data than usualOnly 26% of respondents believe that Friday's data will spur “risk-on” sentiment, while 40% think it will trigger “risk-off” sentiment, and 34% anticipate a “mixed/negligible” response.

“With expectations running high for the 'unemployment rate,' this has become a focal point,” commented Dennis DeBusschere of 22V.

Matthew Weller from Forex.com and City Index emphasized that a critical area to watch is the average hourly earnings metric, which has been on the rise in recent months, intensifying concerns over accelerated wage growth

If this trend persists, it could confine the Fed’s ability to cut rates further.

Weller remarked, “Traders are skeptical about whether the Fed will implement further rate cuts this yearBefore significant moments in Fed decision-making arise, a series of additional employment and inflation reports are due, making this week's employment report unlikely to sway the market as dramatically as other pivotal reports.”

As the NFP report approaches, the financial market remains cautious, with safe-haven assets leading gainsSpot gold has risen for three consecutive days, comfortably trading above $2,670 and inching closer to its historic peak around $2,726.

Fxstreet analyst Valeria Bednarik highlighted in a short-term technical outlook that the bullish potential for spot gold has increased, as the gold price has registered higher highs and higher lows for three consecutive days, expanding its gains amidst all moving averages.

Simultaneously, technical indicators remain in a positive territory, enabling continued price avails

Momentum indicators are trending higher within a positive range, and the Relative Strength Index (RSI) has pulled back slightly from near overbought levels without signaling a bearish trendBednarik suggested keeping an eye on support levels at 2,664.10, 2,645.90, and 2,632.70, while resistance levels to monitor are 2,678.20, 2,692.15, and 2,726.

Another analyst at FXStreet, Christian Borjon Valencia, noted that the technical outlook indicates that gold prices are steadily increasing, having broken past and stabilized above the 50-day moving average of $2,646, with the trend leaning upwardsIf bullish sentiment remains, holding gold prices near $2,670 could potentially lead to further challenges at the $2,700 mark.

They warned, however, that any significant retracement below the 50-day moving average could see a test of support at the 100-day moving average around $2,630. If breached, a further downtrend towards $2,600 could be on the cards.

UBS pointed out that the dollar is facing a crossroads following substantial gains, with tonight’s NFP figures set to be a critical catalyst for the dollar’s next movement

UBS expressed that if the data aligns with expectations, the dollar may not experience significant short-term fluctuationsConversely, a considerable deviation from expectations could trigger substantial volatility in the dollar.

UBS analysts, including Shahab Jalinoos, mentioned that for the dollar to feel a substantial impact, employment growth data needs to fall below 100,000, or the unemployment rate must rise to at least 4.4%. In such a scenario, the market could adequately price in data supporting at least two 25 basis points rate cuts this year, with a strong likelihood in March.

The report suggests that even in such cases, unless accompanied by significant turmoil in equity markets, the immediate exchange rates may not experience dramatic shifts before the data announcement, owing to the risks associated with policy declarations

Despite the divergences in expectations surrounding the dollar, UBS remains bullish, asserting that the agenda post-inauguration will provide continued support for the dollar, potentially sparking further buying momentum.

Conversely, if the market is already anxious about the U.Sinflation dynamics, a job growth figure of 220,000 or more would send shockwaves, while an unemployment rate falling to around 4.0% or an average hourly wage growth exceeding 0.4% would yield similar repercussionsIn this case, the market might attempt to incorporate expectations for a maximum of one 25 basis point rate cut this yearIf the agenda post-inauguration is perceived as aggressive, expectations for rate cuts could dissipate entirely, possibly prompting euro-dollar rates to test new lows around 1.0200 and dollar-yen rates to breach the 160 mark, triggering greater subsequent volatility.

Overall, UBS's report suggests that the market is more likely to elevate the dollar in response to strong data rather than experience significant declines amid weak data.

Disclaimer: The market carries risks, and investments should be approached with caution