Dollar Index steadies near 97.00 as US employment report reveals a resilient labour market
- The DXY US Dollar Index recovers after employment data surprises to the upside, putting into question early rate cuts by the Fed.
- US Nonfarm Payrolls rise 149K in June, surpassing analyst estimates, and the Unemployment Rate unexpectedly declines to 4.1%.
- DXY trades above 97.00, with momentum indicators reflecting an increase in bullishness.
The Dollar Index (DXY) is attempting a recovery in the American session on Thursday, following the latest release of US employment data, which highlighted a resilient labor market.
At the time of writing, a rebound in yields has led to a rise in the US Dollar (USD) against its major currency peers, pushing the DXY above the 97.00 handle.
The market focus has been on the Nonfarm Payrolls (NFP) data, which serves as a barometer of economic growth and has a direct impact on monetary policy, particularly at a time when the US Federal Reserve (Fed) adheres to a data-dependent approach to determine interest rates.
Positive Nonfarm Payrolls report boosts US yields, pushes DXY higher
Expectations were for the Nonfarm Payrolls report to show that the US economy added 110K jobs in June, after increasing by 144K in the previous month.
However, the headline number printed at 149K, surpassing estimates. The unemployment rate fell to 4.1% from 4.2%, while economists had projected it to increase to 4.3%.
Weekly Initial Jobless Claims numbers also decreased, easing concerns over the health of the labour market and reducing the potential for a July interest-rate cut.
Prior to the release of the June employment data, the CME FedWatch Tool indicated that markets were pricing in a 25.3% probability of a 25-basis-point (bps) rate cut in July.
Those numbers have been reduced significantly, with markets now pricing in a mere 4.7% chance of a July cut.
Prospects of higher interest rates make US yields more attractive, boosting demand for the Greenback.
DXY jumps above 97.00, before steadying with the RSI easing back to neutral territory
Since January, the US Dollar has continued to weaken, pushing the DXY to a three-and-a-half-year low this week.
As DXY recovers, the 97.00 psychological level now serves as near-term resistance. With support at the 20-period Simple Moving Average (SMA) at 96.83.
Dollar Index (DXY) 4-hour chart
A break of this level could open the door for a potential retest of the YTD low of 96.38 that was set on Tuesday.
Meanwhile, if the uptrend manages to gain traction above the 50-period SMA at 97.33, the 23.6% Fibonacci retracement level of the May-July decline could come into play at 97.70.
Above that, there is the 98.00 psychological level and the 38.2% Fibo level at 98.52.
The Relative Strength Index (RSI) on the four-hour chart is nearing 57, reflecting a surge in bullish momentum without entering overbought territory.
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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