US Dollar jumps as strong labor market figures favors the case of delaying cuts

The DXY stabilized at 104.15 on Thursday after reaching a daily high of 104.40.
Weekly Jobless Claims came in higher than expected in the week ended in February 3.
Markets digest Fed official Barkin's words.

The US Dollar (USD) steadily rose on Thursday, initially to 103.45 and then stabilizing at 104.15 on the back of positive Initial Jobless Claims figures. However, bulls seem to be running out of steam due to a lack of fresh drivers, while Federal Reserve (Fed) speakers refuse to give additional guidance on the bank’s next steps.

The US Federal Reserve's Chair, Jerome Powell, commented that he considered a cut in March “unlikely”, adding that the bank needs more evidence on inflation coming down to gain confidence for cutting rates. Several officials were on the wires this week but didn’t give new guidance, basically confirming that the Fed awaits more data and disregards cuts in March.

Daily digest market movers: US Dollar gains some ground on positive Jobless Claims

Initial Jobless Claims for the week ended on February 3 fell short of the consensus. The US Department of Labor reported that the claims came in at 218K, lower than the predicted 220K and a slight reduction from the previous week's 227K claims.
According to the CME FedWatch Tool, the possibility of rate cuts in March dropped to 20%. Those odds rise to 50% for the May meeting, where the probability of a hold is also high.
An ascent in US Treasury bond yields also supports the US Dollar. The 2-year yield is at 4.45%, the 5-year yield is at 4.11%, and the 10-year yield is at 4.16%.

Technical analysis: DXY fails to regain the 100-day SMA, bulls still present

The daily Relative Strength Index (RSI) shows a flat slope, albeit in positive territory, hinting at a gradual slowdown in buying momentum. However, it is too soon to anticipate a bearish reversal as positive territory generally denotes a bullish bias.

The Moving Average Convergence Divergence (MACD) presents flat green bars, illustrating a slowdown in bullish momentum but without a bearish crossover. The MACD indicates that buying pressure is still present, albeit reduced.

Regarding the Simple Moving Averages (SMAs), the index is anchored above the 20-day and 200-day SMAs, signaling a bullish bias in the longer framework, yet it is trading below the 100-day SMA, demonstrating some bearish pressure in the intermediate term. In conclusion, the short-term technical outlook seems to be tilted in favor of the bulls, albeit with weakening momentum.

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.

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