US Dollar closes a losing week following soft NFP

US Nonfarm Payrolls report from April underperformed, showing a lower-than-expected increase.
The odds of a rate cut in September increased, which seems to be applying pressure on the USD.

The US Dollar Index (DXY) is visiting the 105 level with sharp losses at the end of the trading week. This comes after Friday’s report of weak US Nonfarm Payrolls (NFP) figures from April, which made markets dump the USD.

The US economy is exhibiting mixed signs of progression with robust demand and a tight labor market exhibiting slow yet significant wage growth, contributing to inflation. Federal Reserve (Fed) Chair Jerome Powell remains cautious about inflation's uncertain trajectory, emphasizing that restrictive monetary policy has curtailed economic overheating. On Friday, weak labor market figures made markets raise the odds of interest rate cuts in September.

Daily digest market movers: DXY down on weak NFPs

US NFP report indicated an increase of 175K jobs in April, lower than the expected 243K, and a decrease from March's revised 315K growth.
Unemployment Rate rises from 3.8% to 3.9%.
Wage inflation, as shown by Average Hourly Earnings, fell to 3.9% YoY from 4.1%.
Market predictions for a Fed rate reduction by September have intensified due to the weak labor market figures.
US Treasury bond yields plunged with the 2-year yield at 4.80%, while the 5-year and 10-year yields declined to 4.50% and 4.58%, respectively.

DXY technical analysis: DXY displays an overall bullish bias despite imminent selling pressure

The technical outlook of DXY primarily mirrors a bullish dominance with a lurking bearish comeback. The Relative Strength Index (RSI) records a negative slope in negative territory, hinting at heightened selling momentum by bears. The relentless bearish push has, however, proven insufficient as the pair still trades above the 100 and 200-day Simple Moving Averages (SMAs).

Furthermore, the Moving Average Convergence Divergence (MACD) reports rising red bars, hinting that bears are gaining ground. The bearish signal should be taken seriously as the sellers pushed the index below the 20-day SMA. However, the longer-term SMAs remain as strong supports to defend the overall bullish outlook.

Employment FAQs

How do employment levels affect currencies?

Labor market conditions are a key element to assess 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 thus 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 and thus monetary policy as 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 its significance as a gauge of the health of the economy and their direct relationship to inflation.

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