US Dollar soft ahead of NFPs

US Dollar is under further scrutiny following dismal ADP and ISM Services PMI data
Markets firming up their view of a September Fed rate cut.
Investors are turning their attention towards the forthcoming Nonfarm Payrolls data from June on Friday.

The US Dollar, represented by the DXY Index, has continued to show weakness as traders assess a series of Wednesday data releases. US traders will remain on the sidelines, celebrating Independence day.

Concerns raised by signs of disinflation and a slowing labor market in the US are being taken into account by market participants, with a September rate cut now seeming more likely. Federal Reserve (Fed) officials are maintaining a conservative stance, however, starting to show concerns about the labor market struggles.

Daily digest market movers: US Dollar softens further amidst poor data, markets prepare for Nonfarm Payrolls

With US traders off to celebrate Independence Day, the market is left to digest Wednesday's data releases.
Private sector employment reported by Automatic Data Processing (ADP) came in lower than expected, with an increase of 150K jobs in June versus a forecast of 160K.
Additionally, the weekly Jobless Claims came in at 238K, which was above the expected figure of 235 K.
The US service sector displayed contraction in June signified by the ISM Services PMI, which hugely missed market expectations of 52.5 by declining to a record low of 48.8 from 53.8 in May.
Minutes from the Federal Reserve’s June 11-12 meeting indicated that officials do acknowledge a slowing US Economy and easing price pressures, yet they refrained from any commitment to rate cuts, preferring a cautious data-dependant approach.
Investors are now shifting their attention to Friday's significantly important June Nonfarm Payrolls report. The Bloomberg consensus predicts 190K jobs, dropping from 272K in May, with 'whisper numbers' forecasting 198K.

DXY Technical Outlook: DXY experiences further headwinds and loses 20-day SMA

The DXY technical outlook turned negative after the index fell below the 20-day Simple Moving Average (SMA). With both the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) now in negative territory, the market is looking at the potential for further decline towards the 105.00 and 104.50 supports if data continues to disappoint.

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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