US Dollar fails to hold NFP gains, Fed bets remain steady
- The DXY Index rallied to 104.60 and then stabilized at 104.30.
- The BLS reported higher-than-expected NFP employment figures from March.
- US Treasury yields soared after the release of the labor data.
The US Dollar Index (DXY) is currently trading at 104.30, trimming steep initial gains on Friday following a surprising beat from the Nonfarm Payrolls (NFP) report. The strong labor market scene, underscored by the better-than-anticipated NFP report for March, solidifies the Dollar's bullish outlook. That being said, the odds of a rate cut in June from the Federal Reserve (Fed) remain high and steady.
US Economic data will continue to guide the timing of the Fed's easing cycle, with consensus still pointing to a June initiation. Next week, markets will eye Consumer Price Index (CPI) figures for March.
Daily digest market movers: DXY soars as labor market data exceeds expectations
- The US Bureau of Labor Statistics (BLS) announced an increase of 303K in March jobs, which greatly surpassed the expected 200K.
- February's previous NFP growth of 275K was revised downward to 200K.
- There was a minor drop in the Unemployment Rate from 3.9% to 3.8%.
- The Labor Force Participation Rate witnessed a slight bump from 62.5% to 62.7%.
- The annual rate of wage inflation, illustrated by Average Hourly Earnings, was adjusted down to 4.1%, aligning with forecasts.
- Regarding the Fed’s stance, officials from the Fed are advising patience before decreasing rates, delivering a mild reinforcement for the USD.
- Regardless of this, the market continues to project a June rate cut at around a 70% likelihood, followed by an approximated total easing of roughly 75bps this year.
- US Treasury yields are rising with the 2-year yield at 4.70%, the 5-year yield at 4.35%, and the 10-year yield at 4.36%.
DXY technical analysis: DXY manifests bullish momentum domination in short-term outlook
As the indicators on the daily chart reflect, the DXY indicates a positive inclination with a favorable tilt on the Relative Strength Index (RSI). The RSI is currently exhibiting a positive slope in positive territory, which echoes the bullish force’s dominance over selling pressure in the immediate scenario. Meanwhile, the Moving Average Convergence Divergence (MACD), despite having flat green bars, still supports the bullish prospects.
Furthermore, the index position concerning its Simple Moving Averages (SMAs) further corroborates this assertion. The DXY positioning above the 20, 100, and 200-day Simple Moving Averages (SMAs) suggests the bulls are asserting their control. As long as the index remains above these levels, the buyers have reason to remain optimistic.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact 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 when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.