US Dollar tallied additional gains, eyes on additional labor market data

USD extends its gains to second day following mixed signals from ADP, ISM Services PMIs.
Business activity in the US service sector expanded in May, ISM Services PMI showing signs of recovering in April.
Markets gear up for Nonfarm Payrolls and Wage inflation data to give additional insight into US economy.

On Wednesday, the US Dollar Index (DXY) extended its gains despite mixed signals about the US economy. The solid performance of the service sector, coupled with lower-than-expected private sector employment data, caused a moderate stir in the market. However, the overall outlook for the US economy remains resilient.

All eyes are now on the upcoming labor market data such as Nonfarm Payrolls, Wage inflation, and Unemployment numbers on Friday, which will provide deeper insights into the state of the US economy. The markets will closely monitor these cues to readjust their bets on rate cuts from the Federal Reserve (Fed).

Daily digest market movers: DXY extends gains amid mixed economic signals

ISM Services PMI for May recovered to 53.8, exceeding the market expectation of 50.8 and marking considerable growth from April's reading of 49.4.
ADP Employment Change report shows US private sector employment rose by 152K in May.
This increase falls short of the market expectation of 173K and lower than the revised 188K additions in April.
Likelihood of interest rate cuts in June and July remain low, while those odds stand at around 60% for September.

DXY technical analysis: USD rebound is in sight despite underlying bearish sentiment

Even though the DXY index has slipped below the 20,100 and 200-day Simple Moving Averages (SMAs), there have been signals of a possible recovery in the last two sessions. The Relative Strength Index (RSI) has risen but still stays below 50, while the Moving Average Convergence Divergence (MACD) depicts lower red bars, reflecting some buying interest.

Despite the overall negative sentiment in the market, bulls are gradually gaining ground. Should they succeed in recovering the convergence of the lost 100 and 200-day SMAs at 104.40, this would considerably brighten the outlook for the DXY index.

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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