According to the CME FedWatch tool, the probability of a Fed rate increase at the September meeting is currently about 50%. The alternative—a pause—has roughly the same odds. The scales are therefore balanced, but today's NFP will break that balance one way or the other: toward hawkishness or dovishness. Everything will depend on the "tone" of the August payrolls, to be published at the start of the US session on Friday.

This report matters not only in isolation but also in the context of recent Fed signals. After Kevin Warsh's high-profile Jackson Hole speech, the market materially increased the odds of a September hike. The Fed chair highlighted persistent inflation risks and allowed that policy might need to tighten further if key inflation indicators do not soften.

On the eve of NFP, however, Fed Governor Christopher Waller effectively pushed the debate back to square one by saying he is prepared to support leaving rates unchanged if inflation pressures continue to ease. As a result, hike odds that had been near 65% fell to roughly 50%.

The labor report therefore sits at the crossroads of monetary expectations. Strong payrolls will strengthen the hawks' case: sustained hiring will indicate the economy can tolerate tighter financial conditions and preserve scope for rate increases. Weak NFP, by contrast—especially after July's poor print—will bolster the Fed's doves.

Consensus expects about 58,000 new jobs in August, after a 23,000 decline in July, with a typical range of forecasts between roughly 45,000 and 65,000. The unemployment rate is broadly expected to remain at 4.1%, while average hourly earnings are forecast to rise about 0.2% month-on-month, implying a slowdown in annual wage growth to roughly 3.0%.

The wage component can materially change how the market reads the entire report. If wages accelerate to 0.4% m/m or higher, Fed inflation concerns will intensify, and hawkish bets will rise. Conversely, weak wage growth (0.2%–0.1% m/m or below) will reinforce the narrative of cooling labor demand and lower inflation risks.

Another key element is the labor force participation rate. In July it fell to 61.4%, the lowest since early 2021 (it was 62.1% in January). At the same time unemployment declined to 4.1%. On the surface that looks paradoxical, but the causal chain is clear: people leaving the labor force are no longer counted as unemployed. In July, the labor force shrank by 264,000 while the population outside the labor force rose by 381,000. If August's unemployment reading remains low solely because participation has fallen, the Fed will struggle to spin that as a hawkish signal.

Context from recent labor indicators is important. ADP's private sector payrolls for August were a weak 38,000—the worst print since January—and JOLTS was mixed: openings rose to 7.27 million, but hires dropped to 5.05 million, and the hiring rate fell to 3.2%. In other words, the US labor market looks increasingly like "low hire, low fire."

Given lowered market expectations, a strong NFP will have outsized influence on policy pricing compared with a weak print. But if the actual result undershoots even modest expectations, the dollar will be under significant pressure. For example, an NFP gain below 40,000 (or a negative print), accompanied by a further fall in participation and wages rising no more than 0.2% m/m, would materially cut September hike odds below 50% and strengthen the case that Waller publicly made for a pause.

If NFP unexpectedly prints strong, Treasury yields will rise, the dollar will strengthen, and EUR/USD will attempt to return to the area of figure 1.15. But for a durable turn in the greenback's favor, more than a strong headline number will be required—a true "hawkish combination": high wage growth, stable unemployment, and no further decline in labor force participation. Otherwise, the pair will get another chance to hold above 1.1630 (the Tenkan-sen on the daily chart) and move toward 1.1660 (the H4 upper Bollinger Band) and, in time, 1.1710 (the D1 upper Bollinger Band).