US Dollar Index trades flat prior to market-moving US data

The US Dollar Index trades slow and steady as traders step aside to wait for key US data.
The US Labor Report could inject some volatility into DXY if it changes inflation expectations.
Recent commentary from Fed officials has shown vacillation and delay in deciding on whether to cut interest rates.

The US Dollar Index (DXY) seesaws between tepid gains and losses on Friday as traders sit on the sidelines prior to the release of market moving data from the US.

The US Nonfarm Payrolls (NFP) report, out at 12:30 GMT may well inject some volatility into the Index.

If the key Labor Market metric paints a positive picture for the labor market it should support the US Dollar, pushing up the DXY.

Alternatively a weak showing in the report would have the opposite effect, pushing down the Dollar Index.

Pay-roll day

Economists expect the headline figure to show the US economy added 200,000 jobs in the month of March after adding 275,000 in February. If the real figure is substantially above this – by a margin of more than 10%, say – it is likely to pressure the DXY higher.

Positive employment growth in the US, which already has a relatively tight labor market, will suggest upward pressure on wages and higher inflation. Higher inflation means the US Federal Reserve (Fed) will have to keep its main interest rate, the Fed Funds Rate, at its current relatively high (5.5%) level for longer. Higher interest rates are positive for the US Dollar since they attract greater inflows of foreign capital.

Another important metric within the NFP report is Average Hourly Earnings, since this more directly impacts inflation expectations. If this metric rises more than forecast it will push up DXY and the opposite if it falls. In the last report wages rose 4.3% YoY and expectations are for a drop to 4.1%.

Fickle rate-setters

The US Dollar Index has been broadly supported during March by a shift in the commentary coming from interest-rate-setters in the US Federal Reserve.

From previously expecting to cut the key interest rate in the US – the Fed Funds Rate – by a total of 0.75% in 2024, in three 0.25% tranches, some members of the decision-making council have changed their opinion and now see less need to cut interest rates.

Their change in view is as a result of inflation remaining higher-than-expected, especially services sector inflation and robust economic growth in the US, which has continued to show dynamism even in the face of higher borrowing costs.

The DXY recovered after a dip on Thursday after Minneapolis Federal Reserve (Fed) Bank President Neel Kashkari raised the prospect the Fed might not cut interest rates at all in 2024 if inflation remained at current levels.

“If inflation continues to move sideways, it makes me wonder if we should cut rates at all this year,” Kashkari said, despite admitting to previously penciling in two rate cuts this year.

European certainty

DXY is a trade-weighted index measuring the strength of the US Dollar versus its main counterparts. The Euro is the main contributor.

In contrast to the vacillation observed at the Fed, there appears to be more of a consensus amongst rate-setters at the European Central Bank (ECB). They are more unanimous in their desire to go ahead with a proposed interest-rate cut in June, a factor supporting DXY and weighing on the Euro (EUR).

The ECB decision, however, is likely to be dependent on whether wage data released prior to the June meeting shows a decline in wage inflation.