The Fed is looking closely at the US job market for signs of how the fight against inflation is going. A weakening job market would be reassuring to the Fed that inflation pressures are under control. This is due to the basic relationship between wages and inflation. This economic model seeks to demonstrate that lower unemployment raises wages, and then the assumption is that higher wages lead to higher prices (inflationary pressures). See below for the Phillips Curve.

What does this mean?

With the Fed meeting on June 14, short-term interest rate markets currently see a 41% chance that the Fed will pause rates in June and a 59% chance of a 25bps hike. Check out the Financial Source interest rate probabilities tracker below.

This means that the labor print will be crucial on Friday in helping decide this finally balanced US rate decision. Expectations are for a headline print of 195K, down from 253K prior. Unemployment is expected to tick higher to 3.5% from 3.4% and average hourly earnings are expected to remain the same at 4.4%. So, this means that the biggest surprise will come from a strong labor print, as a weaker one is already being anticipated. If we see the headline figure above 200k, unemployment below 3.3%, and hourly earnings above 4.5%, then expect the USD to gain on higher rate expectations. The most straightforward FX express of a strong US labor print would likely trigger a EURUSD sell.