EUR/USD plunged yesterday to the low 1.12 area, marking a fresh 16-month price low. The trigger for the latest downward impulse was the ISM manufacturing index release—even though the headline reading remained in expansion territory. The mix of US macro reports published over the past two weeks implies pricing for at least one 25-basis-point Fed rate hike by year-end. Moreover, traders now assign a roughly 20% probability to a 50-basis-point hike later this year, while a tightening at the October meeting is viewed as highly unlikely.

The final puzzle piece in the macro picture is September's nonfarm payrolls, to be released at the start of US trading on Friday. If that report also sides with the greenback, EUR/USD bears will again test the 1.1220 support level, which corresponds to the lower band of the Bollinger Bands on the D1 timeframe.

A few words on the ISM manufacturing index mentioned above: the headline did miss the forecast in September, printing 54.5 versus a 55.0 forecast. The index retreated only marginally from August's 54.6 and remained in expansion. Yet dollar bulls were impressed by the report's internals. The new orders index accelerated to 55.3, employment rose to 52.7, and the backlog orders measure jumped to 56.4. Inflation components also favored the greenback: the prices index jumped 6.8 points to 77.9—the highest reading since the start of the Middle East conflict. The share of firms reporting higher input costs rose to 58.6%, and no sector reported falling prices.

Reacting to the release, EUR/USD fell by more than 100 pips to around 1.1216. A modest corrective bounce followed, but the pair remains under background pressure, trading in a narrow range for now.

Today's official US labor data could provide additional support for the dollar, allowing EUR/USD sellers to probe the 1.11 area for the first time since May last year.

Preliminary forecasts call for the unemployment rate to remain at August's 4.1%. A key focus will be the labor force participation rate. Recall that in July US unemployment fell from 4.2% to 4.1% while participation slipped to 61.4%, meaning the headline improvement partly reflected a smaller labor force. In August participation recovered to 61.6%. Therefore, a further rise in participation in September would be a positive signal for the dollar even if unemployment stays at 4.1%.

Turning to the nonfarm payrolls detail, the consensus expects nonfarm employment to increase by 90,000 in September, down from 162,000 in August. Private sector payrolls are forecast to add about 85,000 jobs (after 127,000 in August). In other words, the market expects a slowdown in hiring, not a collapse.

The composition of the payroll gain will matter: broad contributions from industry, construction, and professional services would be materially stronger for the dollar than a concentration of new jobs in health care and education.

Wage dynamics are also important. Average hourly earnings are expected to rise 0.3% month-on-month and 3.2% year-on-year (after 3.1% in August). If wages meet or exceed expectations, hawkish bets will firm and provide further support to the greenback. Weak wage growth would be an unwelcome signal for dollar bulls, especially if NFP and participation also print on the soft side.

This week's ADP and JOLTS reports were mixed but on balance pointed to a reasonably resilient labor market. ADP showed private sector payrolls up by 90,000 versus a 75,000 forecast, led by health care, education, leisure, and hospitality; financials and professional services weakened. Core wages rose 3.2% year-on-year, so ADP did not signal further acceleration in wage inflation. JOLTS showed open vacancies fell to 7.1 million in August while hires rose to 5.2 million and separations remained low at about 1.6 million—a pattern of low hires and low quits. Weekly initial jobless claims fell to 197,000 yesterday—the lowest reading since July—which also supports the view of labor market resilience.

In summary, today's nonfarm payrolls are particularly important for the dollar. Markets have already priced in roughly one 25-bp Fed hike this year, and the September ISM strengthened the inflationary case. A strong NFP would reinforce the fundamental backdrop and boost the dollar; a weak report would make traders question labor market durability and limit further greenback gains. The interplay of three key factors—payrolls, participation, and wages—will determine whether the current EUR/USD impulse is a prelude to a sustained southward trend (with a decisive break of 1.1220) or whether the pair returns toward the 1.13 area.