US Dollar gets ugly with traders unsure to either follow hawkish Fed or dovish US data

The US Dollar falls back to flat in choppy trading on the back of US data.
Traders see US data contradicting the steady for longer stance from the Fed.
The US Dollar index fals to 104.60, away from a break above 105.00.

The US Dollar (USD) trades flat after a volatile day already this Thursday. Ahead of this Thursday's data, the Greenback rallied higher with markets focused on the hawkish stance of the US Federal Reserve in its recent meeting. Just one rate cut was pencilled in on the Fed's Phillips curve, which was the main driver for the Fed meeting. Fed Chairman Jerome Powell did not say much and left markets rather clueless.

With a very soft Producer Price Index (PPI) number on all fronts and now jobless claims starting to tick up, chances for a too hawkish Fed is starting form. Should more and more softer data start to come in over the summer, the US Dollar Index could continue to ease during the summer time.

Daily digest market movers: softer than soft

At 12:30 GMT, the weekly Jobless Claims and the Producer Price Index numbers were released:
- Weekly jobless claims for the last week of May:
  - Initial claims came in higher from 229,000 to 242,000.
  - Continuing Jobless Claims jumped above 1.800 million, from 1.790 million to 1.820 million.
- May’s Producer Price Index numbers:
  - Monthly headline PPI declined from 0.5% to -0.2%. On year, headline PPI eased from 2.3% to 2.2%.
  - Monthly core PPI fell from 0.5% to 0.0%. Yearly core PPI came in softer as well, from 2.4% to 2.3%.
Federal Reserve Bank of New York President John Williams will be the first Fed speaker to come out of the blackout period that takes place during a Fed rate decision. Williams will participate in a moderated discussion at around 16:00 GMT with US Treasury Secretary Janet Yellen at the Economic Club of New York.
Equities remain very dispersed with both the Nasdaq and the S&P 500 in the green, dragged by the Dow Jones Industrial index which trades in the red.
The CME FedWatch Tool shows a 38.5% chance of Fed interest rate at the current level in September. Odds for a 25-basis-points rate cut stand at 56.7%, while a very slim 4.8% chance is priced in for a 50-basis-points rate cut.
The benchmark 10-year US Treasury Note slides to the lowest level for over a month, near 4.27%.

US Dollar Index Technical Analysis: This is a mess

The US Dollar Index (DXY) faces the consequences of an eventful Wednesday that brought a disinflationary inflation report and a Fed rate decision that clouded the outlook. With the Fed not committing to any plan ahead, any softer data point this summer will contribute to a further easing for the Greenback. In case US data keeps easing, a weaker USD can be expected in the next few months.

On the upside, no big changes to the levels traders need to watch out for. The first is 105.52, a level that held during most of April. The next level to watch is 105.88, which triggered a rejection at the start of May and will likely play its role as resistance again. Further up, the biggest challenge remains at 106.51, the year-to-date high from April 16.

On the downside, the trifecta of Simple Moving Averages (SMA) is still playing support. First, and very close, is the 55-day SMA at 105.07. A touch lower, near 104.48, both the 100-day and the 200-day SMA are forming a double layer of protection to support any declines. Should this area be broken, look for 104.00 to salvage the situation.

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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