US Dollar gathers traction on strong ISM Services PMI, eyes on labor market data
- The DXY Index sees upward movements threatening the 20-day SMA near the 104.00 level.
- The US service sector expanded in November, according to the ISM.
- Investors keenly await the Unemployment Rate and Nonfarm Payrolls reports due this Friday.
- Unit labor costs and ADP Employment change figures from November are due on Wednesday.
The US Dollar (USD), gauged by the US Dollar Index (DXY), is edging higher, currently trading near 104.00 while posing a threat to the 20-day SMA at 104.05. This movement has been largely attributed to releasing a better-than-expected Institute for Supply Management (ISM) Services PMI for November.
Meanwhile, investors are focusing on key employment figures due for release this Friday – specifically the November Unemployment Rate and Nonfarm Payrolls data – as they could suggest further directional moves for the greenback.
Despite cooling inflation in the US economy and mixed labor market and economic activity signals, the Federal Reserve (Fed) continues to refrain from ruling out further policy tightening. This somewhat hawkish stance coincides with the release of key labor data this week, which could dramatically shift market expectations.
Daily Market Movers: US Dollar gains momentum with boost from strong ISM Services PMI
- US Dollar trades with a strong note on Tuesday, threatening the 20-day SMA near the 104.00 mark.
- The Institute for Supply Management’s November report revealed the ISM Services PMI exceeded consensus and previous figures by coming in at 52.7, further propelling the US Dollar’s advance.
- The latest report from US Bureau of Labor Statistics indicated that October JOLTs Job Openings fell by nearly 600K to 8.733 million. This figure was well below the consensus of 9.35 million.
- Looking ahead, important upcoming economic releases include the Unemployment Rate, Nonfarm Payrolls, and Average Hourly Earnings on Friday. These figures will hold significant implications for investors and the US Dollar’s trajectory as they could shape the next Fed decisions.
- Current market expectations from the CME FedWatch Tool indicate that a no hike is priced in for the December meeting and that markets are now pricing in rate cuts for mid 2024.
Technical Analysis: US Dollar bullish momentum strengthens, buyers threaten the 20-day SMA
The indicators on the daily chart clearly depict a strengthening of bullish momentum for the US Dollar. Although in negative territory, the Relative Strength Index (RSI) shows a positive slope, while the Moving Average Convergence Divergence (MACD) is printing rising green bars, offering confirmation of prevailing bullish strength.
Evaluating the longer-term scenario, the index is currently positioned beneath the 20 and 100-day Simple Moving Averages (SMAs) but above the 200-day SMA. This means that overall, whilst experiencing some pressure in the short-term, bulls persistently show their presence in the broader picture. That picture hints at a firm upward trajectory. In case buyers advance and conquer the 20-day SMA, further green may be seen in the short term.
Support levels: 103.60, 103.30, 103.15, 103.00.
Resistance levels: 104.10 (20-day SMA), 104.40 (100-day SMA), 104.50.
Nonfarm Payrolls FAQs
Nonfarm Payrolls (NFP) are part of the US Bureau of Labor Statistics monthly jobs report. The Nonfarm Payrolls component specifically measures the change in the number of people employed in the US during the previous month, excluding the farming industry.
The Nonfarm Payrolls figure can influence the decisions of the Federal Reserve by providing a measure of how successfully the Fed is meeting its mandate of fostering full employment and 2% inflation.
A relatively high NFP figure means more people are in employment, earning more money and therefore probably spending more. A relatively low Nonfarm Payrolls’ result, on the either hand, could mean people are struggling to find work.
The Fed will typically raise interest rates to combat high inflation triggered by low unemployment, and lower them to stimulate a stagnant labor market.
Nonfarm Payrolls generally have a positive correlation with the US Dollar. This means when payrolls’ figures come out higher-than-expected the USD tends to rally and vice versa when they are lower.
NFPs influence the US Dollar by virtue of their impact on inflation, monetary policy expectations and interest rates. A higher NFP usually means the Federal Reserve will be more tight in its monetary policy, supporting the USD.
Nonfarm Payrolls are generally negatively-correlated with the price of Gold. This means a higher-than-expected payrolls’ figure will have a depressing effect on the Gold price and vice versa.
Higher NFP generally has a positive effect on the value of the USD, and like most major commodities Gold is priced in US Dollars. If the USD gains in value, therefore, it requires less Dollars to buy an ounce of Gold.
Also, higher interest rates (typically helped higher NFPs) also lessen the attractiveness of Gold as an investment compared to staying in cash, where the money will at least earn interest.
Nonfarm Payrolls is only one component within a bigger jobs report and it can be overshadowed by the other components.
At times, when NFP come out higher-than-forecast, but the Average Weekly Earnings is lower than expected, the market has ignored the potentially inflationary effect of the headline result and interpreted the fall in earnings as deflationary.
The Participation Rate and the Average Weekly Hours components can also influence the market reaction, but only in seldom events like the “Great Resignation” or the Global Financial Crisis.