US Non-Farm Payrolls October 2026: What the Jobs Miss Means for the Dollar | Bondford

The dollar slipped back from an 18-month high on Friday after September’s non-farm payrolls report delivered a sharp reminder that US labour market strength cannot be taken for granted.

The US economy added just 29,000 jobs in September, against expectations of around 90,000. The previous two months were also revised down by a combined 60,000, while unemployment rose from 4.1% to 4.2%.

The figures were weak enough to materially change expectations for the Fed’s next move. At the start of the week, the probability of another 25bp hike at the October meeting had been around 70%. Following Friday’s report, that conviction had almost completely evaporated, with CME FedWatch putting the probability at just 22%.

Bondford examines what September’s US non-farm payrolls miss — just 29,000 jobs against expectations of 90,000 — means for the Federal Reserve’s rate path, the US dollar outlook and whether the labour market weakness changes the broader currency picture heading into Q4 2026.

For the dollar, the question is whether this is a temporary setback, or the loss of one of its most important supports.

The Fed’s rate advantage is fading

Much of the dollar’s recent strength had rested on a simple proposition: the Fed had resumed raising interest rates in September and was likely to do so again as inflation remained well above target, while a resilient labour market would give policymakers room to continue tightening without jeopardising growth.

That read now looks considerably less convincing.

The latest jobs figures suggest the labour market is losing momentum, while inflation data released earlier in the week also provided reason to doubt the narrative. Headline PCE inflation, the Fed’s preferred measure, rose 0.3% month-on-month in August, below the expected 0.4%, while the annual rate held at 3.4%. Wage growth also softened, with annual average earnings growth slowing to 3.0% in September.

Neither figure is low enough for the Fed to declare victory. But together they suggest inflationary pressures may not yet be spreading more broadly through the economy.

That matters because wages could determine whether the current inflation shock remains a temporary phenomenon or becomes more persistent. The initial rise in prices may be driven by external factors, but the bigger concern for the Fed would be second-round effects: workers demanding higher wages to compensate for lost purchasing power, followed by businesses passing those higher labour costs back into prices. That kind of wage-price feedback loop would make inflation harder to contain and give the Fed a stronger reason to keep policy restrictive. So far, September’s data offer little evidence that this process is gaining momentum.

The September CPI report, due on October 14, will therefore be crucial.

One weak NFP report does not make a weak US economy

There is, however, a danger in reading too much into one month's jobs data.

The US labour market appears to be in a “low-hire, low-fire” phase rather than experiencing a sudden wave of job losses. Unemployment has risen only modestly, and the latest report showed little change across most major industries.

That distinction matters for the Fed. A labour market that is cooling gradually gives policymakers time to wait for more evidence; it does not necessarily require an immediate change in policy.

The Fed therefore has an increasingly valuable option: do nothing.

If the September CPI report does not deliver a major upside surprise, an October rate hike now looks much harder to justify. Attention will instead turn to the data released before the final meeting of the year in December, and whether that meeting remains “live” for another increase.

That makes the dollar more dependent on actual economic data, and less on expectations of a predetermined Fed tightening cycle.

But the US dollar still has friends

That does not mean the dollar suddenly becomes an unattractive currency.

US equities continue to provide a powerful pull for international capital, particularly with technology stocks and AI-related investment remaining strong. A lower expected path for interest rates could even reinforce that attraction by reducing financing costs without necessarily undermining the underlying investment story.

The dollar is also benefiting from its traditional safe-haven role. The latest attempts to make progress towards peace with Iran have again faltered, while the global bond market sell-off has pushed yields higher across major economies. The US has not been immune, but many alternatives look considerably less comfortable.

France illustrates the problem particularly well. French government bond yields have risen sharply in recent weeks as lawmakers struggle to produce a 2027 budget that can satisfy both a fractured parliament and increasingly nervous bond investors. The prospect of greater political uncertainty ahead of next year’s presidential election adds another layer of risk.

At the same time, the G7 has agreed to release up to 100 million barrels of strategic oil and refined-product reserves over four months. That could help contain the near-term energy shock - particularly valuable for the White House with November’s midterms approaching.

A weaker pillar, not a broken dollar

The September jobs report has therefore removed an important pillar of dollar support, but the currency has other advantages to lean on.

The prospect of further Fed rate hikes has weakened substantially, particularly in October, making it harder for the dollar to rely on interest-rate differentials alone to maintain its recent gains.

But currency markets rarely move on one variable. US investment opportunities remain attractive, geopolitical risks continue to favour safe-haven assets and the alternatives are hardly without their own problems.

For now, the dollar may have lost some of its rate advantage without losing its broader appeal. The result could be less a dollar reversal than a shift in what is keeping the currency strong.

The midterms therefore offer no simple bullish or bearish signal for the US currency. Instead, they could shift the balance between two competing risks: a continuation of Trump's fiscal and trade agenda under unified Republican control, or greater congressional constraints accompanied by political gridlock and greater reliance on executive powers.

For the dollar, the crucial question may be which risk markets ultimately value more highly: the inflation and fiscal consequences of fewer constraints on Trump, or the uncertainty that could come with a divided Washington.

Either way, November is unlikely to mark the end of the political risk premium attached to the dollar. It could simply change its form.

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