US Dollar closed the week soft, focus is now on labor market data

US Dollar saw a slight dip at the end of the week, clearing daily gains.
US Dollar finds support amid high US Treasury yields.
May’s PCE data showed an unexpected deceleration in US inflation.

The end of the week saw the US Dollar, as benchmarked by the DXY Index, settle near 105.80, after hitting a high of 106.13 earlier in the session. This follows the release of Personal Consumption Expenditures (PCE) data, but the losses are limited by the high US Treasury yields.

The American economy remains resilient with slight inflationary signals, which is just enough to keep the Federal Reserve (Fed) from completely embracing the easing cycle.

Daily digest market movers: US Dollar dips on weak PCE data

On Friday, May’s Personal Consumption Expenditures (PCE) showed headline inflation soften to 2.6% YoY, down from the previous month’s 2.7%.
Core PCE (which excludes volatile food and energy prices) has also experienced a decline to 2.6% from the previous 2.8% in April.
US Treasury yields provide resilience to the Dollar, with the 2, 5 and 10-year rates at 4.71%, 4.32%, and 4.33%, respectively.
Probability of a Fed rate cut in September marginally increased to 66%, up from the pre-release expectation of 64% as per CME Fedwatch Tool.
Focus will now shift to labor market data from June.

DXY technical outlook: Positive momentum persists, index eyeing higher grounds

Despite the recent data fluctuations, the technical outlook remains positive, with indicators in green but losing some steam. The Relative Strength Index (RSI) continues to be above 50 but appears to point downward, indicating a slight pause in the bullish momentum. The green bars are still developing in the Moving Average Convergence Divergence (MACD), further facilitating the positive view but at a slower pace.

The DXY Index holds above the 20, 100 and 200-day Simple Moving Averages (SMAs), confirming its ongoing positive stance. Despite the Index’s steadiness at the highs seen since mid-May, there is room for further rise, suggesting the DXY is poised for further upside with the 106.50 zone next in sight. Conversely, 105.50 and 105.00 will be areas to observe in case of a drawdown.

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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