US Dollar soars on strong NFPs figures

June 7, 2024 8:01 pm

  • USD maintains its momentum, rising by more than 0.70% on Friday.
  • US Nonfarm Payrolls exceeded market expectations in May, showing a robust recovery in the labor market.
  • September odds fall for a Fed rate cut as positive economic signals abound.

On Friday, the US Dollar Index (DXY) expanded its winning streak following stronger-than-forecasted labor market data. The Nonfarm Payrolls, combined with an increase in wage inflation, outline a robust, resilient economy that may justify the delay of rate cuts by the Federal Reserve (Fed).

Attention now turns to future Fed meetings, with the market eyeing any shift in the monetary policy stance following the positive labor data. The odds for cuts for June and July remain low after the strong employment data, falling to around 50% for September.

Daily digest market movers: DXY strengthens, backed by solid economic results

  • The Nonfarm Payrolls for May surged 272K, surpassing market projections of 185K and demonstrating substantial growth from April’s revised figure of 165K.
  • Unemployment Rate slightly crept higher to 4% from 3.9%.
  • Wage inflation data, as indicated by the percentage change in Average Hourly Earnings, increased to 4.1% on a yearly basis, bouncing from the revised 4% in April.
  • Meanwhile, Treasury yields followed the upward trajectory with the 2, 5 and 10-year rates climbing more than 2% to 4.85%, 4.44%, and 4.41%, respectively.

DXY technical analysis: A bullish reversal sets up as the index recovers key levels

A turnaround in the DXY index’s fortune is becoming more apparent as it jumps above the key Simple Moving Averages (SMAs) of 20,100 and 200-days. The Relative Strength Index (RSI) shifted back above 50, signaling a return to bullish momentum, while the Moving Average Convergence Divergence (MACD) continues to print lower red bars, suggesting that buying interest is picking up.

For a sustained bullish outlook, the DXY bulls need to maintain the critical resistance level at 104.40, regained after the strong jobs data.

Employment FAQs

Labor market conditions are a key element in assessing the health of an economy and thus a key driver for currency valuation. High employment, or low unemployment, has positive implications for consumer spending and economic growth, boosting the value of the local currency. Moreover, a very tight labor market – a situation in which there is a shortage of workers to fill open positions – can also have implications on inflation levels because low labor supply and high demand leads to higher wages.

The pace at which salaries are growing in an economy is key for policymakers. High wage growth means that households have more money to spend, usually leading to price increases in consumer goods. In contrast to more volatile sources of inflation such as energy prices, wage growth is seen as a key component of underlying and persisting inflation as salary increases are unlikely to be undone. Central banks around the world pay close attention to wage growth data when deciding on monetary policy.

The weight that each central bank assigns to labor market conditions depends on its objectives. Some central banks explicitly have mandates related to the labor market beyond controlling inflation levels. The US Federal Reserve (Fed), for example, has the dual mandate of promoting maximum employment and stable prices. Meanwhile, the European Central Bank’s (ECB) sole mandate is to keep inflation under control. Still, and despite whatever mandates they have, labor market conditions are an important factor for policymakers given their significance as a gauge of the health of the economy and their direct relationship to inflation.

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