US Dollar trades with loses after Fed's decision, eyes on NFPs
- The DXY index trades wild mild loses at 106.65.
- The Fed unanimously decided to hold rates at 5.25-5.50% as expected.
- If appropriate, the bank noted that it is ready to adjust further.
- Powell signalled that the end of the tightening cycle is near.
The US Dollar (USD) moved higher on Wednesday, with the DXY Index rising to a nearly one-month high above 107.00 but then retreated to 106.60 after the Federal Reserve (Fed) decision to hold rates at 5.25%-5.50% and Jerome Powell's presser. Markets will now focus on Friday's session, where the US will report October Nonfarm Payrolls figures.
The policymakers pointed out that economic activity in the United States expanded at a strong pace in Q3 while job creation and inflation moderated, adding that if necessary, the bank will adjust further. As an initial reaction, markets are betting on lower odds of one last hike in 2023, with the CME FedWatch tool showing that the probabilities of a 25 basis point (bps) hike declined below 20% while investors are confident that rates have peaked. In line with that, Chair Powell commented that the bank has come "a long way" and that the end of the rate cycle is near, which triggered a USD sell-off as markets cheered the dovish signal.
Daily Digest Market Movers: US Dollar lost momentum after Fed decision, weak housing and economic activity data
- The US DXY index traded in the 106.60 - 107.10 range on Wednesday and, at the time of writing, stands near its opening level at 106.65 with mild losses.
- The Federal Reserve (Fed) held rates steady as expected, but investors are betting that the bank is done tightening.
- The US labour market displays signs of weakness ahead of Friday’s Nonfarm Payrolls from October.
- The Automatic Data Processing Inc. (ADP) reported that Employment Change fell short of expectations in October. The private sector added 113,000 jobs vs the 150,000 expected but accelerated compared to its last reading of 89,000.
- On the economic activity front, The Institute for Supply Management (ISM) reported that its Manufacturing PMI printed at 46.7 in October, below the 49 expected, and declined from its previous reading of 49.
- Meanwhile, US government bond yields are falling sharply, with the 2, 5 and 10-year yields declining to 4.95%, 4.67% and 4.75%, respectively, contributing to the USD loss of momentum.
- According to the CME FedWatch Tool, the odds of a 25 basis points hike in December are still low, below 20%.
Technical Analysis: The US Dollar Index still holds the 20-day SMA with a limited bullish momentum
Observing the daily chart, signs of bullish exhaustion are apparent for the DXY Index. The Relative Strength Index (RSI) exhibits a flat slope above its midline, while the Moving Average Convergence (MACD) histogram displays red bars. As for now, the pair is above the 20,100 and 200-day Simple Moving Average (SMA), indicating a favorable position for the bulls in the bigger picture, but if the bears manage to breach the 20-day average, more downside will be on the horizon.
Supports: 106.30 (20-day SMA), 106.00, 105.70.
Resistances: 106.95, 107.00, 107.30.
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.
Author
Patricio Martín
FXStreet
Patricio is an economist from Argentina passionate about global finance and understanding the daily movements of the markets.
