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US Dollar picks up gains ahead of Nonfarm Payrolls

  • Fed Chair Powell signals inflation still remains high despite significant easing, suggesting an uncertain path forward.
  • Powell acknowledges that strict monetary policy has balanced both inflation and an overheated economy, leveling dual goal risks.
  • Weekly Initial Jobless Claims came in steady.

The US Dollar Index (DXY) is trading mildly higher at 105.80. The Greenback’s modest upward momentum comes despite Federal Reserve (Fed) Chair Jerome Powell’s cautious remarks on inflation and its uncertain future trajectory. Ahead of Nonfarm Payrolls on Friday, weekly Jobless Claims figures seem to be benefiting the USD.

The US economy has seen substantial progress, according to the Fed, yet inflation remains worryingly high and its path uncertain. Although the Fed’s restrictive measures have limited inflation and overheating, progress on inflation has slowed. Nonfarm Payrolls figures on Friday will provide additional guidance for markets on the state of the economy.

Daily digest market movers: DXY backed by stable job market and lowering rate cut odds

  • Weekly Initial Jobless Claims came in at 208K, while no changes were reported in Continuing Claims, which continued to hold at 1.774 million, similar to the previous week.
  • Fed rate cut expectations have slightly shifted, with July odds increasing to 33% and the September and November odds up to 70% and 95%.
  • US Treasury bond yields are mixed. The 2-year yield is moving lower at 4.93%, while the 5-year and 10-year yields are slightly lower at 4.64% and 4.63%, respectively. 
  • For Friday, markets expect a deceleration in April’s Nonfarm Payrolls, while the Average Hourly Earnings are forecasted to see a slight acceleration. The Unemployment Rate is seen coming in unchanged at 3.8%.

DXY technical analysis: DXY bulls continue to struggle, outlook still positive

The DXY’s technical outlook reflects a buying momentum, primarily driven by its position in relation to its Simple Moving Averages (SMAs). Even though the pair has a short-term negative outlook from the bearish tug of war with the bulls, it continues to trade above the 20,100 and 200-day Simple Moving Averages, which suggests a growing strength among the bulls.

The Moving Average Convergence Divergence (MACD) shown by the rising red bars suggests that the bears are advancing. At the same time, the Relative Strength Index (RSI) is in a flat position within positive territory. This indicates that the buying force is weakening while bears push downwards.

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.