US Dollar steady ahead of key labor market data

US Dollar recovers after slight losses following ISM PMIs data.
Dollar finds cushion on high US Treasury yields.
Signs of disinflation have begun to surface in the US economic landscape, which might justify bringing cuts forward.

As the week begins, the US Dollar based on the DXY Index has cleared daily losses and currently sits near 105.90, following the recent ISM Manufacturing PMI figures. The sustained levels of high US Treasury yields continue to lend strength to the DXY.

Distinct signs of disinflation are beginning to emerge within the US economic climate, bolstering confidence among market players for a rate cut in September. Federal Reserve (Fed) officials, however, are treading carefully and continue to abide by their data-dependent stance.

Daily digest market movers: US Dollar recovers despite weak ISM PMIs, eyes on labor market data

ISM Manufacturing PMI recorded a drop, shifting to 48.5 in June from 48.7 in April. This fell below the projected market expectation of 49.1.
The Employment Index, part of the PMI survey, also marked a dip from 51.1 in May to 49.3.
New Orders Index, on the other hand, witnessed an improvement from 45.4 to 49.3.
High anticipation for the week comes for June’s Nonfarm Payrolls to be released this Friday. According to Bloomberg’s consensus, it is expected to be 190K versus 272K in May.
Equally important will be Wednesday’s report on ADP private sector jobs expected at 158K versus 152K in May.
The release of May’s FOMC minutes will provide deeper insights into the Fed’s cautious stance.

DXY technical outlook: Persistent positive momentum, index eyes higher levels

Maintaining a positive outlook, despite minor fluctuations, both the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) depict a stable terrain. The RSI continues to hold above 50 with a marginal flattening, while MACD sustains its green bar projections, indicating minor traction in the bullish momentum.

Resolutely above its 20, 100 and 200-day Simple Moving Averages (SMAs), the DXY continues trading in high levels observed since May, with the 106.50 and 106.00 zones in its sightline. However, observers should also keep an eye on the 105.50 and 105.00 zones in case of potential drawdowns.

Nonfarm Payrolls FAQs

Nonfarm Payrolls (NFP) are part of the US Bureau of Labor Statistics monthly jobs report. The Nonfarm Payrolls component specifically measures the change in the number of people employed in the US during the previous month, excluding the farming industry.

The Nonfarm Payrolls figure can influence the decisions of the Federal Reserve by providing a measure of how successfully the Fed is meeting its mandate of fostering full employment and 2% inflation. A relatively high NFP figure means more people are in employment, earning more money and therefore probably spending more. A relatively low Nonfarm Payrolls’ result, on the either hand, could mean people are struggling to find work. The Fed will typically raise interest rates to combat high inflation triggered by low unemployment, and lower them to stimulate a stagnant labor market.

Nonfarm Payrolls generally have a positive correlation with the US Dollar. This means when payrolls’ figures come out higher-than-expected the USD tends to rally and vice versa when they are lower. NFPs influence the US Dollar by virtue of their impact on inflation, monetary policy expectations and interest rates. A higher NFP usually means the Federal Reserve will be more tight in its monetary policy, supporting the USD.

Nonfarm Payrolls are generally negatively-correlated with the price of Gold. This means a higher-than-expected payrolls’ figure will have a depressing effect on the Gold price and vice versa. Higher NFP generally has a positive effect on the value of the USD, and like most major commodities Gold is priced in US Dollars. If the USD gains in value, therefore, it requires less Dollars to buy an ounce of Gold. Also, higher interest rates (typically helped higher NFPs) also lessen the attractiveness of Gold as an investment compared to staying in cash, where the money will at least earn interest.

Nonfarm Payrolls is only one component within a bigger jobs report and it can be overshadowed by the other components. At times, when NFP come out higher-than-forecast, but the Average Weekly Earnings is lower than expected, the market has ignored the potentially inflationary effect of the headline result and interpreted the fall in earnings as deflationary. The Participation Rate and the Average Weekly Hours components can also influence the market reaction, but only in seldom events like the “Great Resignation” or the Global Financial Crisis.

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