US Dollar lost ground on Monday, eyes on labor market data


  • Weak ISM PMI report for May and decreasing US Treasury yields weigh on USD.
  • ISM Manufacturing PMI report increases odds of Fed rate cut in September.
  • Markets awaiting upcoming Nonfarm Payrolls report and wage growth data.

On Monday, the US Dollar Index (DXY) continued its decline toward the 104.15 area mainly due to the Institute of Supply Management (ISM) PMI report for May. The data led to a decline in US Treasury yields and a slight increase in the odds of a Federal Reserve (Fed) rate cut in September.

Market attention has now shifted toward labor market data, specifically the Nonfarm Payrolls report for May, for investors to gather additional data on the US economy.

Daily digest market movers: DXY retreats due to weak ISM data

  • Investors are signaling concerns with the ISM PMI report due to indications of a contracting manufacturing sector.
  • The ISM Manufacturing PMI for May contracted to 48.7, falling below both the expected 49.6 and April's 49.2, as per the ISM data released on Monday.
  • The lower-than-expected PMI data led to an increase in market-based probabilities of a Fed interest rate cut in September.
  • Following the release, the probability of a rate cut in September increased to nearly 60%.
  • Markets eagerly await the Nonfarm Payrolls report for May, due later this week, which may influence the Fed's future decisions.
  • US Treasury yields saw a sharp decline with the 2, 5 and 10-year yields falling more than 2%.

DXY technical analysis: US Dollar struggles as negative indicators resurface

The DXY fell below the 20, 100 and 200-day Simple Moving Averages (SMAs) on Monday due to the disappointing ISM PMI report. This caused the index to enter a bearish phase.

Similarly, the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) fell into negative territory, indicating a rise in bearish sentiment and selling pressure. However, as the pair now tallies a three-day losing streak there are chances that buyers might step in for a slight upwards correction.

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.

 

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