US Dollar rallies on stronger than expected NFP and wage inflation data

Jun 7, 2024 4:40 PM

USD maintains its momentum, rising by more than 0.70% on Friday.
US Nonfarm Payrolls exceeded market expectations in May, showing a robust recovery in the labor market.
September odds fall for a Fed rate cut as positive economic signals abound.

On Friday, the US Dollar Index (DXY) expanded its winning streak following stronger-than-forecasted labor market data. The Nonfarm Payrolls, combined with an increase in wage inflation, outline a robust, resilient economy that may justify the delay of rate cuts by the Federal Reserve (Fed).

Attention now turns to future Fed meetings, with the market eyeing any shift in the monetary policy stance following the positive labor data. The odds for cuts for June and July remain low after the strong employment data, falling to around 50% for September.

Daily digest market movers: DXY strengthens, backed by solid economic results

The Nonfarm Payrolls for May surged 272K, surpassing market projections of 185K and demonstrating substantial growth from April's revised figure of 165K.
Unemployment Rate slightly crept higher to 4% from 3.9%.
Wage inflation data, as indicated by the percentage change in Average Hourly Earnings, increased to 4.1% on a yearly basis, bouncing from the revised 4% in April.
Meanwhile, Treasury yields followed the upward trajectory with the 2, 5 and 10-year rates climbing more than 2% to 4.85%, 4.44%, and 4.41%, respectively.

DXY technical analysis: A bullish reversal sets up as the index recovers key levels

A turnaround in the DXY index's fortune is becoming more apparent as it jumps above the key Simple Moving Averages (SMAs) of 20,100 and 200-days. The Relative Strength Index (RSI) shifted back above 50, signaling a return to bullish momentum, while the Moving Average Convergence Divergence (MACD) continues to print lower red bars, suggesting that buying interest is picking up.

For a sustained bullish outlook, the DXY bulls need to maintain the critical resistance level at 104.40, regained after the strong jobs data.

US Dollar FAQs

What is the US Dollar?

The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.

How do the decisions of the Federal Reserve impact the US Dollar?

The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.

What is Quantitative Easing and how does it influence the US Dollar?

In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.

What is Quantitative Tightening and how does it influence the US Dollar?

Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.

Disclaimer: For information purposes only. Past performance is not indicative of future results.