US Dollar creeps higher on strong S&P PMI and Jobless Claims figures

May’s PMI and weekly Jobless Claims data outperformed expectations and provided the USD with a lift.
The USD is also registering gains following Wednesday’s relatively hawkish FOMC minutes.
The odds of a cut in September continue to decline.

The US Dollar Index (DXY) is currently trading at 104.90, modestly higher, and managed to clear all its daily losses. This upward trajectory is driven by robust S&P surveys known as the Purchasing Managers Index (PMI) and encouraging weekly Jobless Claims figures, both indicative of a healthier US economy.

The US economy displays strength, and the Fed's cautious approach keeps the Greenback afloat. Next week’s US Personal Consumption Expenditures (PCE) figures for April will determine the short-term trajectory.

Daily digest market movers: DXY strengthens on upbeat PMI data

S&P Global Manufacturing PMI for the US increased to 50.9 in May, up on a monthly basis from 50.0 in April, surpassing economists' forecast of 50.0.
Service sector PMI rose to 54.8 from 51.3 in the previous month, exceeding the prediction of 51.3 on a monthly basis.
Composite PMI for May was reported at 54.4, a significant leap on a monthly basis from 51.3 in April, and surpassed the anticipated decline to 51.1.
US Department of Labor reports 215K employment insurance beneficiaries in the week ending May 18, lower than the estimated 220K and the prior week's figure of 223K, implying a resilient labor market.
Fed maintains a reserved approach toward monetary policy alterations while advocating for continued patience before starting cutting.
Odds of a cut in the September meeting declined below 40%, according to the CME FedWatch Tool.

DXY technical analysis: DXY faces a conflicting medium-term outlook as bears and bulls tussle for dominance

The indicators on the daily chart reflect a sort of stalemate between bullish and bearish perspectives. Despite the bears working to gain ground, the index remains above the 100 and 200-day Simple Moving Averages (SMAs), a strong testament to the presence and resiliency of buying momentum. However, the Relative Strength Index (RSI) flirting with negative territory suggests that a bearish pinch may be on the way.

Moreover, the Moving Average Convergence Divergence (MACD) presents flat red bars, a neutral to bearish sign that could indicate a potential shift in momentum or continued sideways movement.

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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