US Dollar closes a third consecutive losing week, focus shifts to employment data

The DXY Index is seen with losses around 103.15, after reaching a high of 103.70, above the 200-day SMA.
Fed Chair Powell warned that the bank will hike again if needed, keeping its data-dependency approach.
The US ISM Manufacturing PMI declined in November, as expected.
Next week, the US will release November’s Nonfarm Payrolls report.

The US Dollar (USD) Index has shown a modest decline, trading at 103.15, despite Federal Reserve Chair Jerome Powell’s hawkish stance. The November ISM Manufacturing PMI came in lower than expected but didn’t trigger any significant downward movements in the Greenback. What seems to weaken the currency is that markets aren’t buying Powell’s hawkishness.

In line with that, despite cooling inflation and a mixed trend in the United States labour market, the Fed turned surprisingly less dovish, maintaining an open stance toward further policy tightening. While important gauges of inflation like the Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE) have trended lower, the bank has declared that it needs to see more evidence of inflation cooling down, leaving the door open for further tightening if needed.

Daily Market Movers: US Dollar with mild losses despite Powell warning markets

 Chair Powell noted that in a speech at Spelman College on Friday that it is “premature” to say monetary policy is restrictive enough and that the bank will raise rates again if needed to lower inflation.
On the data front, the ISM Manufacturing PMI reported by the Institute for Supply Management marked 46.7 for November, on par with the previous figure while falling short of the anticipated 47.6.
Looking ahead, the US will release November’s Nonfarm Payrolls report on Friday. Overal, job creation is expected to have picked up while wages are seen decelerating.
US bond yields are experiencing a downward trend, with the 2-year, 5-year and 10-year yields standing at 4.57%, 4.16%, and 4.25%, respectively, and seem to limit the upside for the USD.
According to the CME FedWatch Tool, market expectations for the December meeting indicate investors do not expect a rate hike. Additionally, swap markets are pricing in rate cuts midway through 2024.

Technical Analysis: US Dollar selling momentum persists, DXY capped by the 200-day SMA

The indicators on the daily chart paint a bearish picture of the US dollar. The Relative Strength Index (RSI) position underscores strong selling momentum, while the negative skew in the Moving Average Convergence Divergence (MACD) histogram further validates this downward pressure. 

Bolstering the bearish case, the DXY position in relation to the Simple Moving Averages (SMAs) reinforces the downward trajectory. With the DXY remaining below the 20, 100 and 200-day SMAs, it’s apparent that buyers are facing an uphill battle against a prevailing bearish trend. 

Support levels: 103.10, 103.00, 102.90.
Resistance levels: 103.60 (200-day SMA), 104.00, 104.20 (100-day SMA)

Employment FAQs

Labor market conditions are a key element to assess 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 thus 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 and thus monetary policy as 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 its significance as a gauge of the health of the economy and their direct relationship to inflation.

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