US Dollar battles with key level, secures mild gains
- The DXY Index trades over the 100-day SMA as buyers present battle to defend it.
- Building Permits and Housing Starts from December beat expectations.
- Weekly Jobless Claims came in better than expected.
The US Dollar (USD) is caught in an upbeat mood, with the DXY Index trading at 103.50. The gains are buoyed by strong housing and labor data and negative market sentiment. Tensions in the Middle East and the weakening of the Chinese stock market seem to be driving demand for the Greenback.
The US economy appears overheated, tempering the market's dovish expectations, although the chances of interest rate cuts in March and May lingers at around 50%. Thus, the US dollar remains in fluctuating currents, affected by both resilient economic performance and dovish bets on the Fed's likely moves.
Daily digest market movers: US Dollar strengthens on strong Building Permits, Housing Starts and Jobless Claims
- The released Building Permits for December came in at 1.495M, higher than the 1.48M expected, according to the US Census Bureau.
- The Housing Starts for December were 1.46M vs the 1.426M expected.
- The Initial Jobless claims for the week ending January 13 were 187K, lower than the previous 203K claims.
- The yields for US bonds are mixed with the 2-year yield at 4.34%, the 5-year yield at 4.02%, and the 10-year yield at 4.12%.
- As per the CME FedWatch Tool, the odds of cuts for March and May eased, but they remain high at 55% and 45%, respectively.
Technical Analysis: DXY index buyers gradually gain control despite bearish long-term bias
The technical situation in the daily chart reflects a mixed stance between bullish and bearish momentum. The positive slope and positive territory position of the Relative Strength Index (RSI) signifies that buying momentum is gradually building. This is an indication that market participants are getting more bullish over time.
Moreover, the rising green bars of the Moving Average Convergence Divergence (MACD) affirm the increase in buying pressure. On a broader scale, the position of the asset with respect to its Simple Moving Averages (SMAs) gives a mixed picture. The pair is located above the 20 and 100-day SMAs, indicating consistent buying pressure in the short to medium-term. However, the DXY trades below the 200-day SMA, which suggests a bearish bias on a long-term perspective.
Interestingly, despite the recent bearish movements, the fact that bulls are holding their ground and continue to exhibit strength implies that the buying force currently has the upper hand in the market.
Support levels: 103.40 (100-day SMA), 103.00, 102.80, 102.50.
Resistance levels: 103.60, 103.80, 104.00.
Employment FAQs
How do employment levels affect currencies?
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.
Why is wage growth important?
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.
How much do central banks care about employment?
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.