The session had limited news, focusing mainly on the UK retail sales report and the Eurozone’s final Q2 GDP. The UK report was better than expected, while the Eurozone data met forecasts. However, most market attention was on the upcoming US Non-Farm Payroll (NFP) report. Market sentiment was cautious, influenced by recent US data. There was a belief that the upcoming NFP report would show moderate results. Trump made comments about the NFP report, suggesting uncertainties and raising speculation about weak numbers.

The Market Outlook

Movements in the market reflected this cautious sentiment as traders waited for US and Canadian job data. The week ends with high expectations for these important economic indicators. Overall, the market seems to predict a weak Non-Farm Payroll report. We anticipate a number below the consensus forecast of 160,000, which could increase the unemployment rate to 4.1%. This outlook has strengthened throughout the week due to disappointing JOLTS and ADP numbers. If the weak report everyone expects comes through, traders might benefit from downside protection on the dollar, especially through put options on the USD/JPY pair. Moreover, Fed Fund futures are likely to rise, indicating a greater than 70% chance of a rate cut in November, compared to the 50/50 odds earlier in the week. This would confirm our belief that the Fed’s tightening phase has ended.

Potential Market Reactions

However, there could be a larger opportunity if the report surprises on the upside, as many positions are currently dovish. A strong report, anything above 200,000, could lead to a significant market shift and increased dollar volatility. This situation is reminiscent of late 2023 when stronger labor data caught the market off guard and caused a sharp turnaround. Traders wanting to hedge or bet on a strong number might consider buying inexpensive, short-dated call options on the Dollar Index (DXY) for next week. The low premium on these options reflects the current dovish sentiment. If the NFP exceeds expectations, these options could rise significantly in value as the dollar strengthens. No matter the outcome today, the main focus will soon shift to the Federal Reserve meeting on September 17th. This jobs report is the last major data they’ll review before making their decision. Expect implied volatility to decrease sharply after the report, creating a potential opportunity to sell strangles on major currency pairs for those who believe the market will stabilize in a new range. Create your live VT Markets account and start trading now.

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