US Dollar edges higher ahead of key labor market data
- The DXY Index trades with gains in the latest session.
- Investors eagerly await Nonfarm Payrolls, Average Hourly Earnings, Unemployment Rate from December, and FOMC Minutes disclosures.
- Rising US bond yields gave the US Dollar traction.
The US Dollar (USD) began trading at 102.10, marking a noteworthy rise in the index. This upward movement may be explained by markets awaiting direction, and investors seeking refuge in the USD ahead of key labor market reports to be released this week.
In the last meeting of 2023, the Federal Reserve adopted a dovish stance, remaining optimistic about easing inflation trends and ruling out rate hikes in 2024. Despite an indicative 75 bps easing forecast, future actions may alter with incoming data, such as the imminent December labor reports. Market speculations for March and May anticipate rate cuts and small odds for the easing cycle to start in the upcoming meeting in January, which may limit the USD’s momentum.
Daily Market Movers: US Dollar strengthens on the back of US yields recovering despite weak S&P revisions
- The US dollar experiences a positive trade ahead of the labor market data, demonstrating an upward momentum.
- December's revisions from the Manufacturing PMI reported by S&P Global came in at 47.9, falling short of the consensus estimate of 48.2, indicating a slowdown in the manufacturing sector.
- This week, the US will report key labor market figures from December, including the Unemployment Rate, Nonfarm Payrolls, and Average Hourly Earnings. Investors are also keenly waiting for the FOMC Minutes this Wednesday from the last meeting from 2023.
- The US bond yields are on the rise, with the 2-year, 5-year, and 10-year yields trading at 4.32%, 3.91%, and 3.94%, respectively.
- As per the CME FedWatch tool, markets have priced in no hike for the upcoming January meeting, with a mere 15% odds for a rate cut. The markets have also forecasted rate cuts for March and May 2024.
Technical Analysis: DXY bear-dominance persists despite hints of possible short-term bullish reversal
The Relative Strength Index (RSI) paints an optimistic picture as it displays a positive slope in negative territory. This suggests an increasing buying momentum as the index may be embarking on a potential reversal after hitting oversold conditions.
The Moving Average Convergence Divergence (MACD) further strengthens this bullish narrative, presenting rising green bars. This indicates the strengthening of upward momentum and a potential continuation of a bullish trend in the short term.
Yet, when glancing at the Simple Moving Averages (SMAs), the index is trading below the 20, 100, and 200-day SMAs. This predominantly reveals the bearish pressure in the market, overriding the short-term bullish signals of the RSI and MACD.
Support levels: 102.00, 101.50, 101.30.
Resistance levels: 102.40 (20-day SMA), 102.50, 102.70.
(This story was corrected on January 2 at 16:30 GMT to correct the second DXY support level from 102.50 to 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.
