US Nonfarm Payrolls have the potential to pause the dollar rally

Softer US Employment figures could take some steam off the dollar wild run in the last four months, but would not be a game changer

The dollar had an impressive performance in July. Its rally against a basket of other major currencies sent the dollar index surging from 79.75 to a high of 81.65, a 2.38 percent advance for the month from low to high. The technical picture implies that more hefty gains are about to come.

The factors behind this dollar strength include: the notable improvement in the US labor market, the decreasing unemployment level currently staying at 6.1%, the latest uptick in inflation. All these factors shift interest rate hike forecasts closer in the future than previously anticipated.

This Friday, however, has the potential to pause the USD rally and send the currency into a correction territory, because July’s US Employment figures are about to be released shortly. The median analysts forecast is for nonfarm payrolls to increase with 230,000 compared to the 288,000 new workplaces added in the previous month.

The PMI data gives some reasons for anxiety as growth in manufacturing employment slowed down in July for the first time in three months. The service sector displayed a similar picture compared with June. These two figures might result in a poorer than expected payrolls figure.

Worse than previously anticipated US Employment readings for July would serve as a proof of Janet Yellen’s claim that recovery in the labor market is overstated. That would probably play down currency traders’ latest speculation that interest rates are set to rise early next year. The latter would weigh on the US dollar and some steam is going to be taken out of its recent rally.

Even if this scenario turns out into play, the resulting dollar weakness will prove temporary in nature. The USD will resume its strong performance later on in the year.