US Dollar jumps higher with Fed changing narrative amidst bulk US data release on Tuesday

The US Dollar sees overnight comments from Fed Chairman Powell trigger a change in US Dollar sentiment.
In the Middle East, Israel has started its ground offensive in Lebanon, escalating tensions in the region.
The US Dollar Index prints a seven-day high ahead of ISM Manufacturing PMI data.

The US Dollar (USD) starts to pick up speed and rallies on Tuesday ahead of the Manufacturing Purchasing Managers Index (PMI) numbers from the Institute for Supply Management (ISM). The positive turnaround for the Greenback took place after traders priced in less interest rate cuts from the Federal Reserve (Fed) on the back of Chairman Jerome Powell comments.

On the geopolitical side, Israel has started its incursion into Israel in what it calls “a limited ground offensive,” the Financial Times reports. Any further escalation of violence in the region could trigger safe-haven flows that generally tend to support the Greenback.

Looking at the economic calendar ahead, the ISM Manufacturing survey will be the main driver this Tuesday. Still, other elements will take up some attention as well. The JOLTS Job Openings report will give clues about how the demand for labor is evolving, while traders’ eyes and ears will need to be kept open as five Fed members are set to take the stage.

Daily digest market movers: Did the Fed see data coming in stronger?

Fed Chairman Powell left some remarkable comments overnight. One was that the Fed is even taking data into consideration for its upcoming policy meeting during its blackout period. This will make markets even more data dependent in the runup to the event.
Israel is carrying out a “targeted” ground offensive in Lebanon, while Hezbollah is firing back with artillery and rockets targeting Israeli soldiers near the town of Metula. The United Arab Emirates, meanwhile, has issued a statement expressing deep concerns over Israel’s ground operation, warning of repercussions of this dangerous situation for the region, Bloomberg reports.
At 13:45 GMT, the final reading of the S&P Global Manufacturing Purchasing Managers Index (PMI) for September will be released. Economists expect the number to be unchanged from its preliminary estimate of 47.
At 14:00 GMT, the ISM Manufacturing numbers for September will be released:
- The headline PMI is expected to increase slightly to 47.5 from 47.2 a month earlier.
- Among the main subindexes, the Prices Paid component is expected to ease to 53.5 from 54, while the Employment Index is expected to rise to 47 from 46.
In the slipstream of ISM, the JOLTS Job Openings for August will be released as well. Expectations are for a steady 7.670 million job openings against 7.673 million in July.
- Several Fed speakers will take the stage this Tuesday:
At 15:00 GMT, Federal Reserve Bank of Atlanta Raphael Bostic delivers welcoming remarks and moderates a conversation with Federal Reserve Board Governor Lisa Cook at the Technology-Enabled Disruption conference in Atlanta.
Near 22:15 GMT, Federal Reserve Bank of Richmond Thomas Barkin participates in a panel discussion with Atlanta Fed President Raphael Bostic and Boston Fed President Susan Collins at the Technology-Enabled Disruption conference in Atlanta.
European equities are looking for direction, unsure on whether a possible rate cut from the European Central Bank (ECB) in October needs to be considered positive or to be perceived as a sign on the wall that activity in the eurozone is deteriorating quickly. US Futures are trading flat ahead of the US opening bell.
The CME Fedwatch Tool shows a 63.0% chance of a 25 basis-point rate cut at the next Fed meeting on November 7, while 37.0% is pricing in another 50-basis-point rate cut.
The US 10-year benchmark rate trades at 3.73%, looking to test the three-week high at 3.81%.

US Dollar Index Technical Analysis: Rolling through markets like the old days

The US Dollar Index (DXY) gets help from Fed Chairman Jerome Powell, whose comments have eased market expectations of another big rate cut for the upcoming rate decision in November. Fewer odds for a bigger cut support the US Dollar, as it subdues performance from other currencies in the DXY basket such as the Euro (EUR). Markets are increasingly pricing in that the European Central Bank (ECB) might be set to deliver a surprise rate cut in October, which widens the rate differential in favour of a stronger US Dollar.

The recovery looks to be a fierce one with the DXY already taking out four previous daily highs during Tuesday’s Asian trading. In case Dollar bulls can turn things further around, look at 101.90 for the next resistance level on the upside. Just above there, the 55-day Simple Moving Average (SMA) at 102.22 will come in.

On the downside, 100.62 is flipping back from resistance into support, in case the DXY closes above it this Tuesday. The fresh low of 2024 is at 100.16, so a test will take place before more downside takes place. Further down, and that means giving up the big 100.00 level, the July 14, 2023, low at 99.58 comes into play.

US Dollar Index: Daily Chart

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.

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