- ISM's Prices Paid components and Beige Book is pointing to increased inflation.
- Labor market indicators are pointing to robust gains once again.
- The Fed is also walking the walk toward tapering bond buys.
- These three factors are set to push the dollar even higher.
When the information changes, it is time for a fresh market move – the dollar is on the rise on growing speculation that the Federal Reserve will print fewer greenbacks sooner rather than later – and this trend could continue.
Here are three reasons:
1) Inflation evidence
The ISM Services Purchasing Managers' Index usually serves as a hint for Nonfarm Payrolls statistics, but this time, the Prices Paid component is what stands out. This gauge of inflation hit 80.6 points in May, the highest since 2005. The parallel Manufacturing PMI stood at a high of 88 last month.
The Federal Reserve's "Beige Book" also points to anecdotal evidence of not only rising prices but also of increasing wages – which would lead to inflation down the road.
2) America is hiring again
April's Nonfarm Payrolls shocked with a gain of only 266,000 jobs in April, which seemed odd as it contradicted other figures. It was probably a one-off, as the most recent labor figures look strong.
ADP reported a leap of 978,000 private-sector positions in May and weekly jobless claims dropped below the 400,000 mark in the week ending on May 28.
The Federal Reserve has two mandates, inflation and employment, and both are rising quickly, pointing to a reduced need for printing $120 billion/month.
3) Fed nano-tapering as the first step
Almost all officials at the world's most powerful central bank have been sticking to the mantra that inflation is transitory and that the economy has a long way to go. The lone member calling for a discussion on buying fewer bonds was Robert Kaplan of the Dallas Fed. He is not alone anymore.
Philadelphia Fed President Patrick Harker said that the bank should be "thinking of thinking of tapering" – paraphrasing Fed Chair Jerome Powell's comments on refusing to even think of thinking of cutting interest rates.
More importantly, the bank took the first step in cutting purchases – it ended minuscule corporate bond and ETF buying programs from the peak of the pandemic. While these programs account for only $13.6 billion, it seems like a baby step toward a bigger move.
The dollar is already up, will this trend continue? The reason to believe so is that the Fed enters its quiet period ahead of its rate decision on June 16. That means that mounting speculation will likely continue, especially if Nonfarm Payrolls at least meet expectations.
There are reasons to expect the Fed to announce the tapering of bond buys sooner than later – adding further to dollar strength.
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.