The first non farm payroll (NFP) report of the year - and the last of the Biden era - will be released this Friday, which is a crucial event for traders. Trump's escalating and easing tariff policies have dominated market sentiment, and this employment report may still trigger new market volatility.

The next interest rate cut by the Federal Reserve is undecided

Due to the temporary suspension of the US China trade friction, investors are uncertain whether the trade negotiations between the US and neighboring countries Mexico and Canada can quickly achieve results before the monthly deadline, and market risk aversion may continue to play a role. In the upcoming trading session, fundamental factors may become the focus. The Federal Reserve has kept interest rates unchanged after three consecutive rate cuts (the first significant 50 basis point cut in September), but this has left traders guessing when the next action will come.

The futures market expects the Federal Reserve to cut interest rates by 46 basis points before the end of the year - equivalent to two more cuts - but recent statements by the Fed suggest that it may not be eager to further relax monetary policy. As inflation expectations rise and economic indicators remain stable, the Federal Reserve may hesitate to further lower interest rates. After the core personal consumption expenditure (PCE) price index remained stable in December, the Institute for Supply Management (ISM) Manufacturing Purchasing Managers' Index (PMI) survey in January showed that inflationary pressure still exists, the economy is growing steadily, and the manufacturing industry is finally contributing to economic expansion after two years of stagnation.

What to pay attention to on Friday

It is expected that the NFP report will show 170000 new job positions added in January, with a growth rate lower than the 256000 in December. However, the unemployment rate is expected to remain near a historical low of 4.1%, and the average hourly wage may slightly decrease from the previous 3.9% to 3.8%, still within the 2024 range.

From historical data, whether before the pandemic or in the past two years, employment growth in January is usually strong, with over 200000 new jobs added. If the data unexpectedly declines, it may trigger a sell-off of the US dollar, prompting traders to fully digest the expectation of a second interest rate cut - especially in the context of a rebound in unemployment and a slowdown in wage growth. In this situation, the USD/JPY may accelerate its decline and fall below the 200 day moving average (EMA) of 152.17. If it falls below the support level of 151.50, it may further drop to 149.10.

If the report shows that more than 200000 new jobs will be created, which is a typical stronger than expected situation, the possibility of a second interest rate cut may decrease, and the US dollar against the Japanese yen will have a breathing space. However, whether it can rebound to the resistance level of 155.20 on the 20th index moving average remains to be seen, especially with Japan's wage data indicating that the Bank of Japan may raise interest rates.

Overall situation

Unless inflation clearly approaches the 2% target and the prospects for fiscal and trade policies become clearer, the Federal Reserve may remain inactive. Although the total number of interest rate cuts in 2025 is still unknown, even if Friday's employment report far exceeds expectations, given that this year has just begun, a single interest rate cut is still possible. In this situation, the US dollar may rise, especially against European and Australian currencies, which are relatively more susceptible to aggressive monetary easing policies.