- The US Dollar has pared some of the recent losses favoured by a cautious market mood ahead of the NFP report.
- The US economy is expected to have created fewer jobs in October, partly due to the effect of hurricanes and strikes.
- Technical indicators show a loosening bullish momentum, which keeps 103.80 on the bears’ focus.
The US Dollar Index (DXY) is paring some losses on Friday’s European morning trading, with buyers returning after a four-day losing streak. A mild risk aversion ahead of the release of the US Nonfarm Payrolls report has increased support for the safe-haven US Dollar (USD).
The unexpected decline in US jobless claims and the sticky Personal Consumption Expenditures (PCE) Price Index failed to provide significant support to the US Dollar (USD), which hit fresh weekly lows on Thursday.
Stronger-than-expected Consumer Prices Index (CPI) in the Eurozone and some hawkish remarks from the Bank of Japan (BoJ) Governor Kazuo Ueda, lifted the Euro (EUR) and the Japanese Yen (JPY), respectively, and added pressure on the USD.
Daily digest market movers: US Dollar ticks up with key US data on tap
- The US Dollar’s downside attempts remain limited as investors bide their time ahead of the ISM Manufacturing PMI data and the latest US Nonfarm Payrolls report, less than one week ahead of the Federal Reserve’s (Fed) meeting.
- Investors’ bets that former President Donald Trump will win the US presidential election and implement an inflationary policy of low taxes, big spending and tariffs on imports is providing additional support to the US Dollar.
- US Nonfarm Payrolls are expected to have increased by 113K in October, down from the 254K advance seen in September. Hurricanes and strikes might distort the final numbers, so the unemployment rate – which is seen steady at 4.1% – is likely to have particular relevance.
- The ISM Manufacturing PMI is expected to have improved marginally to 47.6 from 47.2 in the previous month. Still, it would remain at levels reflecting contraction in the sector’s business activity.
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DXY technical outlook: Support at 103.85 remains in focus
The DXY index is moving within a horizontal channel, but the broader bullish trend appears to be losing steam and technical indicators show signs of a potential trend shift.
The 4-hour chart shows a bearish divergence in the Relative Strength Index (RSI) and price action capped below the 50-period Simple Moving Average (SMA).
These negative signs keep the support area at 103.85 in play. Below here, the next target would be 103.40. To the upside, the index has some resistance at 104.20 ahead of the October peak at 104.63.
US Dollar Index 4-hour chart
Employment FAQs
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.
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 its significance as a gauge of the health of the economy and their direct relationship to inflation.
