US Dollar continued its downtrend following mixed NFPs
- US Dollar extends its downward trend after ending last week with 0.85% loss.
- NFPs highlight was an unexpected rise in Unemployment.
- Markets are now seeing two cuts in 2024.
The US Dollar, represented by the DXY Index, has extended its decline, weighed down by soft labor market figures falling below 105.00 on Friday.
Amid growing signals of disinflation in the US economy, there is growing confidence in a September rate cut. However, Federal Reserve (Fed) officials continue to refrain from immediate rate cuts, maintaining a data-dependent approach, but have started to acknowledge labor market struggles.
Daily digest market movers: US Dollar sags further after lackluster labor market data
- Nonfarm Payrolls (NFP) in the US increased by 206K in June as reported by the US Bureau of Labor Statistics (BLS) on Friday.
- NFP figure exceeds the market expectation of 190K yet falls short compared to May's revised increase of 218K (adjusted from 272K).
- Unemployment Rate inched higher to 4.1% from 4%, and the Labor Force Participation Rate edged up slightly to 62.6% from 62.5%.
- Average Hourly Earnings, the key metric for wage inflation, dipped to a YoY rise of 3.9% from 4.1%, aligning with market expectations.
- Fed swaps market has resumed full pricing in two rate cuts for year-end.
- Nonetheless, those figures will depend on how Fed officials interpret ongoing labor market data and inflation figures.
DXY technical outlook: DXY continues to be plagued by challenges, now approaching 200-day SMA
After losing its hold over the 20-day Simple Moving Average (SMA), the technical outlook for the DXY Index has turned negative. Both the Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD) indicator have dipped into the negative zone with the latter at its lowest since mid-June.
If the selling pressure persists, the 104.70 level (200-day SMA) will offer strong support.
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.