* Nonfarm payrolls expected to increase 164,000 in July

* Unemployment rate seen holding steady at 3.7%

* Average hourly earnings expected to rise 0.2%

By Lucia Mutikani

WASHINGTON, Aug 2 (Reuters) - U.S. job growth likely slowed in July after outsized gains in the prior month, with wages probably maintaining their moderate pace of increase, which could boost market expectations for another interest rate cut from the Federal Reserve next month.

The Labor Department's closely watched monthly employment report on Friday will come on the heels of Wednesday's decision by the U.S. central bank to cut its short-term interest rate for the first time since 2008.

Fed Chairman Jerome Powell described the widely anticipated 25-basis-point cut as insurance against downside risks to the 10-year old economic expansion, the longest in history, from trade tensions and slowing global growth. Powell said the move was "not the beginning of a long series of rate cuts," but also added that he was not saying "it was just one."

Nonfarm payrolls probably increased by 164,000 jobs last month after surging 224,000 in June, according to a Reuters survey of economists. The anticipated job gains would be below the monthly average of 172,000 in the first half.

"If we get a report like we are expecting tomorrow, I don't think it's going to change anything from the market's perspective of wanting another rate cut," said Josh Wright, chief economist at iCIMS in New York. "I don't think it will give the Fed the confidence to push back on the market."

Financial market expectations for a rate cut in September jumped on Thursday after President Donald Trump announced an additional 10% tariff on $300 billion worth of Chinese imports starting Sept. 1 after negotiators failed to kick start trade talks between the world's two largest economies.

Fed funds futures implied traders now see a 70% chance the Fed would lower rates again in September, up from 51% late on Wednesday, CME Group's FedWatch tool showed.

The U.S.-China trade war is taking a toll on manufacturing, with production declining for two straight quarters. Business investment has also been hit, contracting in the second quarter for the first-time in more than three years and contributing to holding back the economy to a 2.1% annualized growth rate. The economy grew at a 3.1% pace in the first quarter.

July payrolls would mark a further deceleration in job growth from an average of 223,000 per month in 2018.

"It remains unclear whether that is due more to moderating demand or to the increasing difficulty of finding additional workers at the margin," said Lou Crandall, chief economist at Wrightson ICAP in Jersey City, New Jersey.