US Dollar stabilizes around 104.00 after US opening
- The US Dollar has eroded the bottom of the weekly range, despite sticky PCE inflation and lower claims.
- A moderately hawkish BoJ Governor Kazuo Ueda and higher inflationary pressures in the Euro Area have weighed on the USD.
- DXY bounces from fresh lows, battles to reconquer the 104.00 threshold
The US Dollar Index (DXY) has failed to draw any significant support from the unexpected decline in US Jobless Claims and the sticky inflationary pressures highlighted by the Core Personal Consumption Expenditures (PCE) Prices Index.
From a wider perspective, the US Dollar (USD) remains relatively close to the three-month highs hit earlier this month and is on track to close its best monthly performance in more than two years.
Investors remain looking from the sidelines awaiting Friday’s Nonfarm Payrolls (NFP) report, which will determine the pace of the Federal Reserve's easing cycle.
Daily digest market movers: The US Dollar trims gains ahead of October's NFP report
- The US PCE Prices Index grew at a steady 2.1% yearly pace in October, down from September's 2.2%. The Coree Inflation, more relevant for the Federal Reserve, has remained steady at 2.7% against the market consensus of a decline to 2.6%.
- US Jobless Claims fell to 216K in the week of October 25 instead of increasing to 230K as the market consensus anticipated. The previous week's data has been revised to 228K from the previously reported 227K.
- Elsewhere, the Eurozone Consumer Prices Index (CPI) data for October has revealed higher-than-expected inflationary pressures. This, combined with the positive surprise in the Q3 GDP, has dampened hopes of aggressive interest-rate cuts by the ECB, providing some support to the Euro (EUR).
- The Bank of Japan (BoJ) kept interest rates unchanged on Thursday but Governor Kazuo Ueda signaled further monetary normalization if conditions are met. This has given some oxygen to a battered Japanese Yen (JPY), adding pressure to the USD.
- Investors' focus now is on Friday’s Nonfarm Payrolls (NFP) report, which is expected to show a significant decline in new payrolls. If these figures are confirmed, the US Dollar could extend its correction.
DXY technical outlook: Support at 103.90 is under pressure
The DXY index is showing an increasing bearish momentum, as failure to break the resistance area above 104.55 has increased bearish pressure towards the 103.90 area, which is being tested at the moment.
The 4-hour Relative Strength Index (RSI) indicator has crossed below its midline but turned higher, limiting the bearish potential of the index. At the same time, it bounced from around a 100-period Simple Moving Average (SMA) but holds below a bearish 20 SMA. Further depreciation below 103.90 would confirm a deeper correction and bring 103.40 into focus. Resistances remain at at the 104.55-104.75 area and 105.20.
Employment FAQs
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.
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 its significance as a gauge of the health of the economy and their direct relationship to inflation.
Author
Guillermo Alcala
FXStreet
Graduated in Communication Sciences at the Universidad del Pais Vasco and Universiteit van Amsterdam, Guillermo has been working as financial news editor and copywriter in diverse Forex-related firms, like FXStreet and Kantox.
