US Dollar flat as ADP miss erodes earlier gains

Most Recent Article: US Dollar records mild gains as DXY jumps above 20-day SMA after soft ADP figures

  • The DXY US Dollar Index could snap its winning streak after ADP print.
  • Traders are seeing ADP still holding above 100,000 despite undershooting estimates. 
  • The US Dollar Index retreats from 104 and could be heading sideways into Friday's US Jobs Report. 

The US Dollar (USD) is rolling over and trades in the red after ADP numbers failed to add more US Dollar strength. The underperforming ADP numbers have triggered risk on in equities and see US yields decline further. The mix of all this is base of a bit of Greenback weakness. 

On the economic front, traders had the monthly ADP number which, as already mentioned, was a miss on estimates. The 103,000 print was substantially below the expected 130,000 and the previous 113,000. Despite the low number, the Greenback is holding steady in the reaction thereafter, with traders seeing support in the fact that the ADP is holding above 100,000.

Daily digest: Back to square one

  • At 12:00 GMT, the Mortgage Bankers Association released its weekly Mortgage Applications Index. Previous was at 0.3%, and now came in at 2.8%. 
  • Around 13:15 GMT, the ADP Employment number for November dropped to 103,000, coming from 113,000 previous.
  • US Trade Balance data for October got printed after ADP:
    • Goods and Services Trade Balance went from $61.5 billion deficit to $64.3 billion deficit.
    • The Goods Trade Balance was at a deficit of $89.8 billion in September, and went to a deficit of $89.5 billion.
    • Nonfarm Productivity for the third quarter, saw an uptick from 4.7% to 5.2%.
    • Unit Labor Costs for the third quarter declined from -0.8% to -1.2%. 
  • Equities are trying to turn the tide on their negative performance for December. All indices are up across the globe, with Asian equities rallying over 1%. European and US indices are in the green, though less than 1%.
  • The CME Group’s FedWatch Tool shows that markets are pricing in a 99.7% chance that the Federal Reserve will keep interest rates unchanged at its meeting next week.  
  • The benchmark 10-year US Treasury Note drops to 4.15%. Yields in Europe are falling even quicker. 

US Dollar Index technical analysis: Hiccup towards Friday

The US Dollar trades around 104.00 and looks set to head into a third straight day of gains. Although yields are declining in the US, they are falling even quicker in Europe and other countries, which means that intrinsically the US Dollar is valued higher in terms of return than most of its peers. This rate differential, which persists even in a declining-rate-environment, could see the US Dollar Index (DXY) head back to levels near 105.00-106.00.

The DXY broke the high on Monday and closed off near 103.54 on Tuesday. The DXY could still make it further up, should employment data trigger rising US yields again. A two-tiered pattern of a daily close lower followed by an opening higher would quickly see the DXY back above 104.28, with the 55-day and 100-day Simple Moving Averages (SMA) turned over to support levels. 

To the downside, the 200-day SMA shouldact as support and not allow the DXY to drop below 103.57. If it fails, the lows of June make sense to look for some support near 101.92. Should more events take place that initiate further declines in US rates, expect to see a near-full unwind of the 2023 summer rally, heading to 100.82, followed by 100.00 and 99.41.

Nonfarm Payrolls FAQs

What are Nonfarm Payrolls?

Nonfarm Payrolls (NFP) are part of the US Bureau of Labor Statistics monthly jobs report. The Nonfarm Payrolls component specifically measures the change in the number of people employed in the US during the previous month, excluding the farming industry.

How does Nonfarm Payrolls influence the Federal Reserve monetary policy decisions?

The Nonfarm Payrolls figure can influence the decisions of the Federal Reserve by providing a measure of how successfully the Fed is meeting its mandate of fostering full employment and 2% inflation.
A relatively high NFP figure means more people are in employment, earning more money and therefore probably spending more. A relatively low Nonfarm Payrolls’ result, on the either hand, could mean people are struggling to find work.
The Fed will typically raise interest rates to combat high inflation triggered by low unemployment, and lower them to stimulate a stagnant labor market.

How does Nonfarm Payrolls affect the US Dollar?

Nonfarm Payrolls generally have a positive correlation with the US Dollar. This means when payrolls’ figures come out higher-than-expected the USD tends to rally and vice versa when they are lower.
NFPs influence the US Dollar by virtue of their impact on inflation, monetary policy expectations and interest rates. A higher NFP usually means the Federal Reserve will be more tight in its monetary policy, supporting the USD.

How does Nonfarm Payrolls affect Gold?

Nonfarm Payrolls are generally negatively-correlated with the price of Gold. This means a higher-than-expected payrolls’ figure will have a depressing effect on the Gold price and vice versa.
Higher NFP generally has a positive effect on the value of the USD, and like most major commodities Gold is priced in US Dollars. If the USD gains in value, therefore, it requires less Dollars to buy an ounce of Gold.
Also, higher interest rates (typically helped higher NFPs) also lessen the attractiveness of Gold as an investment compared to staying in cash, where the money will at least earn interest.

Sometimes Nonfarm Payrolls trigger an opposite reaction than what the market expects. Why is that?

Nonfarm Payrolls is only one component within a bigger jobs report and it can be overshadowed by the other components.
At times, when NFP come out higher-than-forecast, but the Average Weekly Earnings is lower than expected, the market has ignored the potentially inflationary effect of the headline result and interpreted the fall in earnings as deflationary.
The Participation Rate and the Average Weekly Hours components can also influence the market reaction, but only in seldom events like the “Great Resignation” or the Global Financial Crisis.

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