- The ADP report on Employment Change is expected to print 160K in June.
- The Federal Reserve may continue delaying interest rate cuts on strong employment reports.
- The US Dollar is technically bullish and may reach 106.45 with an upbeat report.
On Wednesday, the United States (US) Automatic Data Processing (ADP) Research Institute will release its monthly report on private sector job creation for June. The announcement, known as the ADP Employment Change, is expected to show that the country’s private sector added 160K new positions in June after adding 152K in May.
The survey is usually released two days before the official Nonfarm Payrolls (NFP) report, and despite random divergences in the outcome, market participants tend to read it as an advanced indicator of the Bureau of Labor Statistics (BLS) report. A strong job creation in the private sector will likely be seen as an upcoming upbeat NFP report.
ADP Jobs Report: Employment and the Federal Reserve
The US central bank, the Federal Reserve (Fed), has a dual mandate: price stability and maximum sustainable employment. According to the Fed, price stability equals inflation, averaging 2%, while maximum sustainable employment is the highest level of employment the economy can sustain without generating unwelcome inflation.
Inflationary levels have eased sustainably after hitting multi-decade highs in the pandemic aftermath, yet the labor market has been quite tight, which increases the risk of higher price pressures. Behind the Fed’s reluctance to trim interest rates is not just inflation still above 2%.
The central bank met earlier in June, and Chairman Jerome Powell said data had not given the Federal Open Market Committee (FOMC) enough confidence to begin rate cuts.
“As labor market tightness has eased and inflation has declined over the past year, the risks of reaching unemployment and inflation goals have moved towards better balance,” Powell said. “Our economy has made considerable progress towards both goals of maintaining maximum employment and stable prices,” he added. However, Powell and co remained cautious about potential rate cuts, with market participants now hoping for just one 25 basis points (bps) cut this year.
With that in mind, a strong ADP survey and a subsequent strong NFP report will further delay the odds of a rate cut. A hawkish outcome should then give additional impetus to the USD Index.
When will the ADP Report be released, and how could it affect the USD Index?
ADP will release the Employment Change report on Wednesday, July 3. As previously said, it is expected to reveal that the private sector added 160K new positions in June. Generally speaking, a better-than-anticipated report should underpin the USD Index, while a disappointing reading will pressure it.
The US will release the Challenger Job Cuts report ahead of the ADP survey, published by Challenger, Grey & Christmas monthly. The report provides information on the number of announced corporate layoffs by industry and region. In May, US-based employers announced 63,816 job cuts, a 1.5% decline from the previous month and down 20% from 80,089 cuts announced in May 2023. The figure is unlikely to directly affect the USD index but will add to the impact of the ADP report.
Valeria Bednarik, Chief Analyst at FXStreet, takes a technical look at charts and says: “The USD Index hovers around 106.00, trading near its June monthly high at 106.13. According to the daily chart, the Index is poised to extend its advance, given the positive momentum of technical indicators, advancing within positive levels. Furthermore, the USD Index trades above all its moving averages, with the 20 Simple Moving Average (SMA) gaining upward traction above the longer ones. The next relevant level to watch is 106.49, the high posted on May 1 in the Fed’s monetary policy decision aftermath. The bullish case will be supported by a better-than-anticipated report.”
Bednarik adds: “Should the ADP figure disappoint, the USD Index may enter a corrective decline, as a sustained decline remains out of the picture for now. A strong support level comes at 105.40, followed by the 105.10 price zone.”
US Dollar FAQs
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.
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.
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.
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.
Economic Indicator
Challenger Job Cuts
Challenger Job Cuts, released by Challenger, Grey & Christmas monthly, provides information on the number of announced corporate layoffs by industry and region. The report is an indicator used by investors to determine the strength of the labor market. Usually, a high reading is seen as negative (or bearish) for the US Dollar (USD), while a low reading is seen as positive (or bullish).
