- DXY index declined to 106.15, down by 0.50% on the day.
- US government bond yields are declining, while Wall St indexes are rising.
- Focus is set on Friday's Nonfarm Payrolls report for October.
The US Dollar (USD) tumbled on Thursday, and the DXY index declined to 106.15, driven by dovish bets on the Federal Reserve (Fed) and falling US bond yields following Wednesday’s decision and Chair Powell’s tone. All eyes are now on the Nonfarm Payrolls (NFP) report from October on Friday, which could set the tone of the USD in the short term and extend its losses.
The Federal Reserve (Fed) and Chair Jerome Powell welcomed the latest data, which showed that the United States economy remains strong, and noted that the job creation pace and inflation are decelerating. In addition, Powell hinted that the bank has tightened significantly and that in the next decisions, he will consider the tighter financial conditions and the cumulative effects of monetary policy.
Daily Digest Market Movers: US Dollar declines on dovish bets on the Fed, labor market weakness
- The DXY index plunged below the 20-day SMA, towards 106.15, down by 0.50%.
- Ahead of October NFPs on Friday, the US reported soft labour market data.
- The Unit Labour Costs from Q3 declined by 0.8% QoQ, while markets expected a 0.7% expansion.
- In addition, the US Department of Labor revealed that the Initial Jobless Claims from the week ending October 28 came in higher than expected. Folks filing for unemployment benefits came in at 217,000, higher than the consensus of 210,000 and an increase in relation to its last reading of 212,000.
- Elsewhere, US Treasury yields are sharply falling. The 2-year rate fell to 4.99%, while the longer-term 5 and 10-year rates retreated toward 4.63% and 4.67%, hindering the US Dollar from finding demand.
- According to the CME FedWatch Tool, the odds of a 25-basis-point hike in December are still low, around 20%, adding further pressure to the USD.
Technical Analysis: US Dollar Index bulls give up, losing the 20-day SMA
The technical analysis of the daily chart suggests a neutral to bearish stance for the DXY Index as the bears work on staging a recovery and exerting their presence. The Relative Strength Index (RSI) points southward below its midline, while the Moving Average Convergence (MACD) histogram displays increasing red bars. Furthermore, the index is below the 20-day Simple Moving Average (SMA), which could pave the way for additional downward movements in the short term.
That being said, the DXY holds above the 100 and 200-day SMAs, pointing toward the prevailing strength of the bulls in the larger context.
Supports: 106.00, 105.70, 105.50
Resistances: 106.30 (20-day SMA), 106.50,106.90.
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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