Non-farm employment report triggers USD volatility expectations; market traders bet on rate cuts in 2026

The United States will release its first major employment report since the government reopened on December 16, including October non-farm payroll data and the full November non-farm payroll data. The release of this report will set the tone for subsequent market trends.

Market Expectations Diverge

According to general forecasts, US non-farm employment in October is expected to decrease by 10,000 jobs, while November data is anticipated to show a strong increase of 130,000 jobs. However, Citigroup economists are cautious about this rebound in data, believing that the growth mainly results from seasonal adjustments rather than a “substantive improvement in labor demand.”

Rate Cut Expectations Dominate Market Sentiment

The latest Fed dot plot indicates that only one rate cut is planned for 2026. However, market traders have differing views; data from the CME FedWatch tool shows traders are betting that the Federal Reserve will cut rates twice in 2026, one more than the official indication. Based on current market expectations, the next rate cut by the Fed is projected for April 2026, with a 61% probability.

DWS Americas Fixed Income Head George Catrambone emphasized, “The direction of interest rates will be determined by labor market performance. This non-farm payroll data is crucial.”

However, WisdomTree Fixed Income Strategist Kevin Flanagan cautioned that due to government shutdown impacts on data collection, the reference value of this week’s report may be limited. He advised investors to focus on the December non-farm payroll report to be released by the U.S. Bureau of Labor Statistics on January 9, 2026.

Non-Farm Data Will Determine USD, US Stocks, and Gold Trends

If non-farm data exceeds expectations, it will reinforce the market’s expectation that the Fed will keep interest rates unchanged, leading to a strengthening of the US dollar and negatively impacting US stocks and gold. Conversely, if the data is weak, the market will increase bets on rate cuts, which will weaken the dollar and benefit gold and US stocks.

Morgan Stanley believes there is ample downside space for the dollar, expecting it to decline by 5% in the first half of 2026, with sufficient market pricing for a deeper rate cut cycle.

Citibank holds an opposite view, believing that the US economy remains strong and will continue to attract international capital inflows, enough to support the dollar exchange rate. The institution stated, “The dollar cycle recovery potential in 2026 is strong.”

Market focus is now clearly centered on this week’s employment data, which will lay the foundation for the short-term trends of the dollar, US stocks, and gold markets.