- US Dollar DXY finds some footing closer to 104.00 as sellers seem to take a breather.
- Federal Reserve officials continue to maintain a cautious stance, with a rate cut expected in September.
- Concerns over the US labor market might weigh on the USD.
On Thursday, the US Dollar measured by the DXY index experienced a rebound, closing in on the 104.00 mark, despite concerns over the labor market. The rise came about as sellers appeared to hit the pause button. Market anticipations of a rate cut in September by the Federal Reserve and the frailty in the US labor market will be key topics to follow as they might put additional pressure on the currency.
The US economic outlook shows indications of disinflation, with financial markets expressing confidence in a rate cut in September. Despite this, Federal Reserve officials display reluctance to rush into interest rate cuts and still adhere to a data-dependent approach.
Daily digest market movers: DXY rebound, rising jobless claims raise alarms about the US labor market health
- Data from the US Department of Labor indicated a surge in Jobless Claims for the week ended July 13 by 243K, surpassing initial predictions of 230K, and worse than the prior gain of 223K (revised from 239K).
- On a positive note, the Philadelphia Fed Manufacturing Survey for July recorded a markedly greater improvement than expected, hitting 13.9 after recording 1.3 in June.
- Following the data, dovish bets on the Fed remain steady.
- According to the CME FedWatch Tool, a rate cut in September seems to be priced and limits the upside for the USD.
- If data continues to come in weak, markets might consider a cut in the upcoming July meeting.
DXY Technical Outlook: Bearish outlook continues slight recovery to the upside seems probable
The DXY managed a rebound near the vicinity of the 104.00 area but the outlook remains bearish with the index below the 20,100 and 200-day Simple Moving Average (SMA). With daily technical indicators, like the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD), still languishing below 50, it indicates the weight of the bearish outlook has not subsided. However, the DXY index may see a minor correction to the upside in the forthcoming sessions.
The strong support levels remain at 103.50 and 103.00. However, the overall technical outlook continues to favor the bears.
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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