- US Dollar displays strength ahead of Wednesday Fed decision and labor market data
- Fed is expected to remain data-dependant but leave door open for September cut
- Markets are extremely confident about a September cut of 25 bps
The US Dollar represented by the DXY index charged forward on Monday despite looming uncertainties. The market remains on edge with September's potential rate cut by the Federal Reserve (Fed) somewhat uncertain, but optimism surrounding the US economy's strength is tempering anxieties. The Fed decision on Wednesday and labor market data will guide markets this week.
There is growing evidence of disinflation in the current US economic landscape, which solidifies the market's belief in a prospective rate cut in September. However, the broader economy demonstrates strength, as is made evident by recent data surprises like the Q2 Gross Domestic Product (GDP) and July S&P Global PMIs, which might give the Fed reasons not to rush a rate cut.
Daily digest market movers: US Dollar firms ahead of July labor data and FOMC meeting
- Two-day FOMC meeting concludes on Wednesday with a plausible commitment to unchanged rates
- Market players recognize the solid performance of the US economy warrants no immediate action by the Fed, but September FOMC meeting is predicted to bring a potential rate cut into the spotlight
- Chair Powell's press conference has the potential to sway markets, but his precedent of focusing on labor market uncertainty is likely to continue
- In that sense, labor market data to be released throughout the week will guide market bets regarding the September decision
DXY technical outlook: Bearish signs stall as index inches toward 20-day SMA
Pushing past initial signs of struggle, DXY Index is now rebounding from 200-day Simple Moving Average (SMA). The 20-day SMA is now viewed as the next target. However, key indicators such as the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD), though still in the red, are inching toward positive terrain.
Continued support is noted at 104.30 and 104.15 levels, while resistances are observed at 104.60 and 104.80 levels.
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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