US Dollar extends gains on strong GDP and Jobless Claims figures, focus turns to PCE data
- The Q4 US GDP was revised higher to 3.4%, while Initial Jobless Claims came strong.
- The March Chicago PMI came in lower than expected.
- US Treasury yields stand mixed and limit the upside for the USD.
The US Dollar Index (DXY) initially soared to 104.70 but then stabilized at 104.50. On the positive side, Gross Domestic Product (GDP) revision and strong weekly Initial Jobless Claims figures from the US benefited the Greenback. But the weaker-than-expected Chicago PMI seems to have brought down the USD’s momentum.
The US economy appears steady with the Federal Reserve’s (Fed) stance treading a cautious path. Despite upward revisions in inflation projections, the Fed, under Powell's guidance, refrains from overreacting to short-term spikes in inflation. The speculated start of an easing cycle in June remains dependent on incoming data.
Daily digest market movers: DXY fails to hold its rally to highs since February, eyes on PCE
- Unemployment data came in slightly below consensus at 210K against the anticipated 215K for the week ending on March 23.
- Q4 Gross Domestic Product (GDP) was revised higher to a yearly growth of 3.4%.
- On the negative side, the March Chicago Purchasing Managers Index (PMI) data released by the Institute for Supply Management was below expectations at 41.4, against the forecasted 46 and previous 44.
- US Treasury bond yields show mixed results with the 2-year yield at 4.60%, 5-year yield at 4.20%, and 10-year yield at 4.19%.
- The probability of a rate cut in June has dropped to 66% compared to 85% at the beginning of the week, which seems to be cushioning the Greenback.
- The week’s highlight will be the headline Personal Consumption Expenditures (PCE) due on Friday, which is expected to have risen by 2.5% YoY, while the core measure is seen coming in at 2.8%.
- The outcome of the Fed’s preferred gauge of inflation will dictate the pace of the USD for the short term.
DXY technical analysis: DXY bulls are in command, but struggle to make a significant upward move
The Relative Strength Index (RSI) is mildly up around 60, while the Moving Average Convergence Divergence (MACD) manifests green bars that suggest a presence of bullish momentum. Yet it remains to be seen if the current buying traction can spur the DXY to higher levels as the MACD is also hinting at limited upward potential.
Looking broadly, the DXY sits comfortably above the 20, 100, and 200-day Simple Moving Averages (SMAs), indicating that the buying momentum is stronger in a larger context. This suggests that despite short-term bearish undertones, the bulls have a firmer grip in the long run.
Despite their dominance, the bulls are currently steady but seem to be struggling to gain more ground, which can impact the short-term dynamic of the DXY.
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
Patricio Martín
FXStreet
Patricio is an economist from Argentina passionate about global finance and understanding the daily movements of the markets.
