- US Dollar recovers after slight losses following ISM PMIs data.
- Dollar finds cushion on high US Treasury yields.
- Signs of disinflation have begun to surface in the US economic landscape, which might justify bringing cuts forward.
As the week begins, the US Dollar based on the DXY Index has cleared daily losses and currently sits near 105.90, following the recent ISM Manufacturing PMI figures. The sustained levels of high US Treasury yields continue to lend strength to the DXY.
Distinct signs of disinflation are beginning to emerge within the US economic climate, bolstering confidence among market players for a rate cut in September. Federal Reserve (Fed) officials, however, are treading carefully and continue to abide by their data-dependent stance.
Daily digest market movers: US Dollar recovers despite weak ISM PMIs, eyes on labor market data
- ISM Manufacturing PMI recorded a drop, shifting to 48.5 in June from 48.7 in April. This fell below the projected market expectation of 49.1.
- The Employment Index, part of the PMI survey, also marked a dip from 51.1 in May to 49.3.
- New Orders Index, on the other hand, witnessed an improvement from 45.4 to 49.3.
- High anticipation for the week comes for June’s Nonfarm Payrolls to be released this Friday. According to Bloomberg’s consensus, it is expected to be 190K versus 272K in May.
- Equally important will be Wednesday’s report on ADP private sector jobs expected at 158K versus 152K in May.
- The release of May’s FOMC minutes will provide deeper insights into the Fed’s cautious stance.
DXY technical outlook: Persistent positive momentum, index eyes higher levels
Maintaining a positive outlook, despite minor fluctuations, both the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) depict a stable terrain. The RSI continues to hold above 50 with a marginal flattening, while MACD sustains its green bar projections, indicating minor traction in the bullish momentum.
Resolutely above its 20, 100 and 200-day Simple Moving Averages (SMAs), the DXY continues trading in high levels observed since May, with the 106.50 and 106.00 zones in its sightline. However, observers should also keep an eye on the 105.50 and 105.00 zones in case of potential drawdowns.
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.