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US Dollar takes a quick breather ahead of high-tier data

  • US Dollar dips despite October ADP employment data showing private sector payrolls increased by 233K, surpassing expectations.
  • Q3 US GDP growth of 2.8% falls short of market forecasts but remains strong amidst global economic slowdown.
  • Focus shifts to Friday's NFP report, which could negatively impact the US Dollar.

The US Dollar Index (DXY), which measures the value of the USD against a basket of six currencies, lost ground on Wednesday following the release of mixed economic data. September’s ADP Employment Change report exceeded market expectations in October, but a downward revision in third-quarter GDP growth made the USD tumble.

However, investors remain cautious ahead of Friday's Nonfarm Payrolls (NFP) report, which may paint a different picture of the labor market.

Daily digest market movers: US Dollar rises on strong ADP employment figures

  • US ADP Employment Change beat expectations with a 233K increase in October, which could limit the USD losses.
  • September's ADP Employment Change reading was revised up to a 159K increase, further supporting the US Dollar.
  • US Q3 Gross Domestic Product grew at a 2.8% pace, stronger than global peers but below market expectations.
  • Futures markets now almost fully price in a quarter-point interest rate cut by the Fed next week.
  • Friday's NFP report is expected to show a significant decline in payrolls, potentially hurting speculative demand for the US Dollar.

DXY technical outlook: DXY consolidates, may test 200-day SMA

The DXY index is consolidating and may be poised to revisit the 200-day SMA at 103.50. The Relative Strength Index (RSI) is declining but remains near overbought territory, while the Moving Average Convergence Divergence (MACD) is printing smaller green bars.

Key support levels are 104.50, 104.30 and 104.00, while resistance is found at 104.70, 104.90 and 105.00.

Employment FAQs

Labor market conditions are a key element in assessing 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 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 because 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 their significance as a gauge of the health of the economy and their direct relationship to inflation.

Author

Patricio Martín

Patricio is an economist from Argentina passionate about global finance and understanding the daily movements of the markets.

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