• Any higher-than-expected wages increase would boost the dollar, in this high-probability scenario.
  • Slower salary gains would send the greenback down. 
  • An as-expected outcome would create an opportunity to go against the trend. 

"It's all 'bout the money, it's all 'bout the dum dum da da dum dum" – the 1990s song by Meja is humming in my mind as I await the Nonfarm Payrolls report for May. How high were Americans' pay raises last month? That is a critical question for investors.

Fed focus

The Federal Reserve is laser-focused on depressing rising inflation, prioritizing the price stability side of its mandate over employment – the opposite of what it stated in its grand policy review in 2020. The focus has changed as price rises have grabbed the psyche of the world's largest economy in mid-2021 and the problem has only exacerbated since then.

Not only has the price at the pump pushed higher, but also the costs of a broad basket of goods. The Core Personal Consumption Expenditure (Core PCE) is the Fed's preferred gauge of inflation, and it stands at 4.9% as of April – more than double the bank's 2% target. 

Core PCE is off the highs, but it is too early to say it has peaked:

Source: FXStreet

While energy and food prices are influenced by global markets, broad inflation is fueled by demand from American workers. A low unemployment rate of 3.6% is set to make way to an even lower level of 3.5%. After an increase of 420,000 jobs in April, May's report is set to show a somewhat lower advance of 325,000 according to the economic calendar. 

Money matters

However, even if these two figures stray away from forecasts – even significantly – what matters more is how much money these workers earn. If labor shortages continue and force employers to raise salaries, the extra cash will go to spend, fueling inflation. In turn, the Fed will have to raise rates at a faster pace, trying harder to cool the economy. Higher borrowing costs make the dollar more attractive.

If some moderation is seen in wages, that would imply softer price pressures and an economy that is already moderating and does require intervention from the central bank to cool off. Talking heads on financial media would say that inflation has peaked, which would result in a sell-off of the dollar. 

As with the recent Consumer Price Index (CPI) release, base effects from last year make the yearly figures less significant than usual, putting the focus on the monthly figure.

Economists forecast Average Hourly Earnings MoM to have risen by 0.4% in May, in the middle between 0.3% recorded in April and 0.5% in March. Any minor deviation from 0.4% is set to make a substantial difference to the dollar. 

Average Hourly Earnings MoM

Source: FXStreet

Three scenarios

1) Above expectations: A rise of 0.5% or more in monthly salaries would undoubtedly boost the dollar. It would show that employers are willing to cough up higher pay to attract workers, and perhaps even that they could pass these higher costs to consumers. That means more inflation in the pipeline. 

In my opinion, this scenario has the highest probability. Wage growth has tended to alternate between beating estimates and missing them. After last month's disappointment, we could see an upswing now. Moreover, most recent economic indicators such as the ISM Manufacturing PMI, have pointed to an economy that is on fire.

2) Below expectations: Wage growth of 0.3% or lower would send the greenback lower. It would imply that faint signs of peak inflation were, perhaps, more significant. It would allow the Fed to stick to its plan of raising rates by 50 bps in June and July – but moderating its moves afterward. 

I think that this scenario has a medium probability, as it is backed by some signs of weakness in the housing sector, that may imply worries about spiraling costs. 

3) Within expectations: Meeting economists' forecasts has not been common in this indicator for some time, so there is a low chance it would happen this time. However, in this scenario, we could see other factors come into play, such as monthly revisions for April and March, the yearly number and the headline NFP. 

I think that this would be a scenario in which the dollar jumps to one direction in the initial, knee-jerk reaction, and then later corrects – an opportunity to go contrarian.

Final thoughts

Nonfarm Payrolls remain significant despite the focus on inflation – it just means that this pivot puts the spotlight on wage data rather than the headline change in jobs. 

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.

If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.

FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.

The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.

Feed news Join Telegram

Recommended Content

Recommended Content

Editors’ Picks

EUR/USD rebounds, steadies above 1.0400

EUR/USD rebounds, steadies above 1.0400

EUR/USD has staged a rebound and reclaimed 1.0400 during the American trading hours on Friday with the US Dollar Index retreating from the multi-week high it set at above 105.60. Nevertheless, the pair remains on track to close the week in negative territory. 


GBP/USD climbs to 1.2050 area, looks to post weekly losses

GBP/USD climbs to 1.2050 area, looks to post weekly losses

GBP/USD reversed its direction and advanced to the 1.2050 area after having dropped to 1.1976 earlier in the day. The pair is still down more than 1% on the day with safe-haven flows dominating the financial markets following the disappointing PMI data from the US.


Gold rebounds above $1,800 as US yields fall sharply

Gold rebounds above $1,800 as US yields fall sharply

Gold has regained its traction and recovered above $1,800 after having slumped to a multi-month low below $1,790. Following the dismal PMI data from the US, the benchmark 10-year US Treasury bond yield is down more than 6% on the day, fueling XAU/USD's rebound.

Gold News

Why traders are rushing to exit positions on Cardano’s ADA price

Why traders are rushing to exit positions on Cardano’s ADA price

Cardano (ADA) price has had its performance review as the summer kicks off. ADA bulls are returning home with not-that-good a scorecard, and the underperformance could cut short holiday funding for the cryptocurrency.

Read more

FXStreet Premium users exceed expectations

FXStreet Premium users exceed expectations

Tap into our 20 years Forex trading experience and get ahead of the markets. Maximize our actionable content, be part of our community, and chat with our experts. Join FXStreet Premium today!