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US Dollar flat ahead of NFP with high expectations penciled in

  • The US Dollar trades mixed on Friday ahead of key US economic data. 
  • Markets are still digesting the interest rate cut from the ECB ahead of the US Employment Report. 
  • The US Dollar Index dips lower and already fell below 104.00 in the early Asian session. 

The US Dollar (USD) edges lower on Friday but manages to hold above the 104.00 level ahead of the US Nonfarm Payrolls data for May. The Greenback struggles near weekly lows after the European Central Bank (ECB) delivered a 25 basis points interest rate cut on Thursday, setting the ECB rate on Deposit Facility to 3.75% from 4%. The fact that ECB’s officials gave no forward guidance on interest rates leaves markets feeling that it was a one-and-done, and dampens hopes for further easing. 

On the economic front, besides the ECB revaluation, markets are on the lookout for the US Employment Report for May, with the Nonfarm Payrolls number, monthly wage growth and unemployment rate as three main drivers. The consensus for the Nonfarm Payrolls is an increase by 185,000 after the 175,000 seen in April. The range of views varies from 120,000 on the low end to 258,000 on the upside. Most significant market movements are expected should the number come below or above the lower and higher end of the range. 

Daily digest market movers: You can hear a needle drop in markets right now

  • At 12:30 GMT, the US Employment Report for May will be released:
    • Nonfarm Payrolls are expected to increase by 185,000 after the 175,000 additions in April.
    • Monthly Average Hourly Earnings are expected to tick up to 0.3% in May from 02.% a month before.
    • Yearly Average Hourly Earnings should remain stable at 3.9%.
    • Unemployment Rate should remain unchanged at 3.9%.
    • As always, a number that falls in line with expectations will not have a significant market impact, whereas a print below 120,000 or above 258,000 for the Nonfarm Payrolls figure will see a pickup in volatility. 
  • Equities are trading with minor losses in Asia and Europe, while US futures are gently heading into the green. 
  • According to the CME Fedwatch Tool, 30-day Fed Fund futures pricing data suggests a 31.8% chance of keeping rates unchanged in September, against a 55.7% chance of a 25 basis points (bps) rate cut and a 12.3% chance of an even 50 bps rate cut. For the upcoming meeting on June 12, markets are fully pricing that rates will remain at current levels. 
  • The benchmark 10-year US Treasury Note trades around 4.29%, near its fresh monthly low of 4.27% from Wednesday. 

US Dollar Index Technical Analysis: Data overload this week

The US Dollar Index (DXY) is flirting with a drop below the 104.00 handle. Some brief excursions below this level have already been made in the past few days, though for now, this area still sees ample amounts of buying interest. The question is how long those buyers will last, and should NFP come in under the weakest projection, something could snap. 

On the upside, the DXY first faces a confluence resistance in the 200-day Simple Moving Average (SMA) and the 100-day SMA at 104.44. Further up, the pivotal level near 104.60 comes into play. For now, the topside can be seen around 105.00, with the 55-day SMA coinciding with this round number and the peak from recent weeks at 105.08.

On the downside, the 104.00 big figure looks to be holding. Once through there, another decline to 103.50 and even 103.00  are the levels to watch. With the Relative Strength Index (RSI) still not oversold, more downsides are still under consideration. 

Fed FAQs

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.