US Dollar mildly down ahead of the weekend
|- Stabilization in risk sentiment lends support to the USD despite lack of fresh fundamentals.
- Fed officials paint an optimistic picture of the US labor markets despite slow job growth.
- Market adjusts easing expectations; first rate cut expected in September with slightly lower odds.
The US Dollar (USD), measured by the US Dollar Index (DXY), showed sideways movement above the 103.00 level in Friday's session. This comes amid stabilized risk sentiment and flat trading in US stock index futures following Thursday's rally, with the 10-year US yield remaining around 4% early in the day.
Despite adjustments in market expectations for future monetary policy decisions, the US economic outlook continues to indicate growth above trend, suggesting premature market anticipation for aggressive easing.
Daily digest market movers: US Dollar stable as Fed officials highlight healthy labor market
- Hints on the labor market were provided by Federal Reserve (Fed) officials who shared views that the market is not dire despite slow job growth.
- Barkin noted that businesses are managing headcount through attrition or slowing hiring, but not laying people off, indicating cautious but not panicked market behavior.
- Schmid reaffirmed that inflation is almost within the required range and that the strength of the economy will determine the policy path.
- Goolsbee, however, warned that it's important to determine whether the job market cooling is a temporary or ongoing event.
- The weekly jobless claims data also helped calm markets, with initial claims coming in lower than expected at 233K versus an expected 240K.
- Market pricing suggests less than 10% odds of an immediate cut and around 80% odds of a cut in September. These estimates indicate that markets are still fully pricing in 100 basis points of Fed easing by year-end, as well as 175-200 points of total easing over the next 12 months.
DXY technical outlook: Bearish bias persists as buyers struggle for significant movement
The DXY outlook remains bearish, with buyers struggling to make a significant move. The index is still operating beneath the 20, 100 and 200-day Simple Moving Averages (SMAs), confirming an overall bearish bias.
The momentum-based Relative Strength Index (RSI) is still below 50, indicating continued selling pressure, while the Moving Average Convergence Divergence (MACD) continues to print lower red bars. Despite the week's gains, the overall technical outlook has not significantly improved, with potential for a correction still observed.
Supports: 103.00, 102.50, 102.20 Resistances: 103.50, 104.00
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.
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