US Dollar extends losses to multi-month lows, eyes on Jobless Claims

The DXY Index fell to its lowest level since July, below 101.00.
Markets are placing bets on six rate cuts by the Federal Reserve for 2024.
As for now, investors are pricing in the first cut in March.

Patricio Martín FXStreet

The US Dollar (USD) continues to experience sharp losses, with the US Dollar Index (DXY) trading at 100.95 its lowest level in five months. This downturn has been largely driven by dovish bets taking precedence following the release of soft US Personal Consumption Expenditures (PCE) Price Index figures last week.

In the last meeting of 2023, the Federal Reserve showcased a dovish stance, welcoming tame inflation figures and ruling out a 2024 rate hike, favoring 75 bps of easing instead. Market anticipations for March and May rate cuts further underscore this position. The prospects of monetary easing by the Fed typically weaken the US Dollar, as reduced interest rates make dollar-denominated assets less attractive, leading investors to seek higher yields elsewhere. Moreover, the release of soft US PCE Price Index figures exacerbated those bets as cooling inflation favors the case for a sooner-than-expected start of the easing cycle.

Daily digest market movers: US Dollar Index retreats amid dovish market expectations, lower bond yields weigh

The US Core Personal Consumption Expenditures (PCE) Price Index in November was reported to have increased by 3.2% year-over-year, slightly below market expectations of 3.3%.
According to the CME FedWatch Tool, markets are predicting a rate hold for the upcoming January Federal Reserve meeting, and it shows a low probability of 15% for a rate cut. For the March and May 2024 meetings, markets are pricing in rate cuts.
Overall, markets are pricing in 160 bps of easing in 2024 vs the median of the Federal Open Market Committee (FOMC) of 75 bps.
No relevant reports are due in the last week of 2023. Markets will keep an eye on Thursday’s weekly US Jobless Claims.

Technical Analysis: DXY Index selling pressure persists, an upward correction is likely

The indicators on the daily chart reflect a dominant selling pressure on the US Dollar Index. The Relative Strength Index (RSI) is currently in oversold levels, which, from a contrarian perspective, signals a potential upcoming correction. The Moving Average Convergence Divergence (MACD) displays rising red bars, usually an indication of significant bearish momentum.

On a broader scale, the index is positioned below the 20, 100, and 200-day Simple Moving Averages (SMAs), a strong testament to the persistent bearish control in the market. In the face of these indicators, buyers need to significantly step up their endeavors for a bullish reversal to occur.

Support levels: 100.80, 100.50, 100.30.
Resistance levels: 101.00, 101.30, 101.50.

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.

Author

Patricio Martín

FXStreet

Patricio is an economist from Argentina passionate about global finance and understanding the daily movements of the markets.

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