US Dollar neutral as markets await catalysts

FXStreetSep 2, 2024 6:30 PM

US Dollar takes a breather after last week's rally.
August jobs report on Friday is anticipated to show a significant increase in Nonfarm Payrolls.
Market expectations for 100 bps of easing from the Fed by year-end remain unchanged.

On Monday, the US Dollar Index (DXY), which measures the US Dollar’s value against a basket of six major currencies, consolidated above 101.50, extending after last week's gain of more than 1%. Markets await key labor data this week, and the August jobs report, due for release on Friday, is anticipated to show a robust increase in Nonfarm Payrolls (NFP), which might provide support to the US Dollar.

Despite ongoing economic growth that exceeds expectations, the market's anticipation of aggressive monetary easing appears to have become excessive. However, a cut by the Federal Reserve (Fed) in September is a done deal, but its size will depend on the incoming data.

Daily digest market movers: DXY flat on quiet Monday ahead of key data

Consensus estimates for August's Nonfarm Payrolls is 165K, with a whisper number of 150K.
Unemployment Rate is expected to fall to 4.2%, while Average Hourly Earnings are expected to rise to 3.7%.
Other data this week, including ISM manufacturing and services PMIs, are expected to decline slightly but remain in expansionary territory.
Moreover, the Fed's Beige Book report is expected to show that the labor market remains tight.
Dovish bets on the Fed remain steady, and investors are still seeing 100 bps of cuts by year-end.

DXY technical outlook: Index consolidates after last week's rally, DXY must hold 101.50 line

The DXY Index experienced a consolidation phase after last week's rally, which resulted in weekly gains of nearly 1%. Currently, the Relative Strength Index (RSI) is below 50, while the Moving Average Convergence Divergence (MACD) is displaying rising green bars, indicating a potential bullish trend. Both indicators point to bullish momentum flattening out but recovering overall.

The key support levels for the DXY are 101.50, 101.30 and 101.00, while the resistance levels are 101.80, 102.00 and 102.30.

Employment FAQs

How do employment levels affect currencies?

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.

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 their significance as a gauge of the health of the economy and their direct relationship to inflation.

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