- US Dollar Index falls due to profit-taking, still trades above 104.00.
- Economists predict 3.0% growth for US Q3 GDP, which might continue favoring the USD.
- ISM Manufacturing PMI is expected to climb four points to 47.6, while the labor market is expected to show poor results for October.
The US Dollar Index (DXY), which measures the value of the USD against a basket of six currencies, declined on Monday. Thisreversed earlier gains amid profit-taking ahead of key economic figures from October to be released later this week.
Despite a robust economy, the US Dollar faces headwinds. DXY breached its 200-day SMA but now consolidates due to overbought conditions. Fed officials remain cautious on inflation, and markets anticipate rate cuts by year-end.
Daily digest market movers: US Dollar retraces from gains ahead of high-tier data
- The US economy is expected to grow at a steady pace in Q3 as indicated by forecasts and economic models such as GDPNow and the New York Fed's Nowcast.
- The S&P Global US Manufacturing PMI rose to a two-month high in October, indicating a slight improvement in the manufacturing sector.
- ISM PMIs from the same month to be released on Friday will give further details.
- The positive economic data suggests that the US economy remains resilient despite global headwinds, supporting the US Dollar's strength.
- Labor market figures are expected to see poor results on Friday with Nonfarm Payrolls estimated below 200K in October, which might weigh on the USD.
DXY technical outlook: DXY overbought, buyers lose momentum
The DXY index briefly surpassed the 200-day SMA last week, but buyers lost momentum due to overextended upward moves. The index is now anticipating sideways movement to correct the overbought conditions.
Despite some gains at the week's end, indicators remain near the overbought zone. Support lies at 104.50, 104.30 and 104.00, while resistance levels exist at 104.70, 104.90 and 105.00.
Nonfarm Payrolls FAQs
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.
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.
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.
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.
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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