ADP Employment Report set to show another month of weak US hiring

The Automatic Data Processing (ADP) Research Institute will release its monthly report on private-sector job creation for August next Wednesday. The ADP Employment Change report is expected to show that the United States (US) private sector added 47K new positions this month, little changed from the 44K new jobs reported in July.

The ADP report precedes the all-important Nonfarm Payrolls (NFP) report, which will be released by the US Bureau of Labor Statistics on Friday. The ADP is hardly an advanced indicator of NFP trends; however, it holds significant relevance as it tends to set the tone for the official employment report, which is a cornerstone for the Federal Reserve’s (Fed) monetary policy. In that sense, a surprise in ADP data often triggers significant US Dollar (USD) volatility.

ADP jobs report, likely to shed some light on the Fed’s monetary policy

August’s ADP report comes out at a moment when the Federal Reserve’s policy is gathering increasing attention, as Chairman Kevin Warsh strives to deal with US President Donald Trump’s pressure to cut interest rates, persistent inflation concerns pulling in the opposite direction, and a split Federal Open Market Committee (FOMC).

Beyond that, the US Treasury Secretary, Scott Bessent, announced a plan to double buybacks of long-term government Bonds, another sign that the US government wants to avoid a more restrictive monetary policy by all means.

Commerzbank analysts expect political resistance to monetary tightening to increase heading into September’s Fed meeting: “The impression created by these actions (Treasury buyback plans) is that the US fiscal authorities are keen to contain upward pressure on yields, albeit through unconventional measures rather than through greater fiscal discipline that might convince markets to demand lower risk premia.”

The experts caution that “this is a development that the Federal Reserve cannot ignore,” since “Fed rate hikes would make it more difficult for the Treasury’s efforts to cap yields,” reinforcing the case for policy restraint even as inflation remains elevated.

Bearing this in mind, a 47K increase in ADP employment is far from the reading needed to assure a Federal Reserve rate hike in September. July’s 44K figure marked the weakest job creation since January and, unless the final reading beats the market consensus by a wide margin, August data will not show any significant improvement in job creation, let alone a miss.

When will the ADP report be released, and how could it affect the USD?

The US ADP Employment Change report will be out on Wednesday at 12:15 GMT, and is expected to show that private-sector employment increased by 47K in August. The reading comes with the US Dollar struggling to extend its recovery from mid-August lows.

Investors’ aversion to risk amid growing tensions in the Middle East and higher global yields, together with Fed Chair Warsh’s hawkish comments at the Jackson Hole meeting, are supporting the Greenback, but concerns about the ballooning US government debt and the US Treasury’s buyback plan continue to act as headwinds.

DXY Chart Analysis

Guillermo Alcalá, Analyst at FXStreet, observes the US Dollar Index (DXY), which tracks the Greenback’s value against a basket of six major currencies, is “picking up from lows near 98.50, but likely to meet relevant resistance at the 100.00 psychological area, which capped rallies several times in August.” “Momentum indicators on the daily chart are turning positive, and price action crossed above the 200-day Simple Moving Average (SMA), at 99.14 last week, which is a bullish sign,” says Alcalá.

“The index, however, is not out of the woods, after dropping nearly 3% in the first two weeks of August. Bulls would need strong employment figures this week, ideally combined with hot CPI data next week to convince Fed policymakers that conditions are set for some monetary policy tightening. This scenario would push the DXY beyond the 38.6% Fibonacci retracement, at 99.76, which is capping rallies this week and probably also above the mentioned 100.00 level,” according to Alcalá

US Dollar FAQs

The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022.
Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.

The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.

In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system.
It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.

Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.

Economic Indicator

ADP Employment Change

The ADP Employment Change is a gauge of employment in the private sector released by the largest payroll processor in the US, Automatic Data Processing Inc. It measures the change in the number of people privately employed in the US. Generally speaking, a rise in the indicator has positive implications for consumer spending and is stimulative of economic growth. So a high reading is traditionally seen as bullish for the US Dollar (USD), while a low reading is seen as bearish.

Tags: