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USD recovers as strong NFP data could delay rate cut

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Portraits Of U S Presidents On Dollar Bills Gm465128326 59608952 Large.jpg
  • The US Dollar maintained its momentum, rising by over 0.70% on Friday.
  • U.S. nonfarm payrolls rose above market expectations in May, signaling a strong recovery in the labor market.
  • A number of encouraging signs about the economy have reduced the likelihood of a Fed rate cut in September.

The US Dollar Index (DXY) continued its winning streak on Friday after better-than-expected labor market data. Rising nonfarm payrolls and wage inflation suggest a strong and resilient economy that may justify a delay in interest rate cuts by the Federal Reserve.

Attention now turns to the upcoming Fed meeting, where markets are watching to see if the positive employment data will lead to a change in monetary policy stance. The positive employment data makes rate cuts less likely in June and July, with rates now expected to fall to around 50% in September.

Daily Digest Market Trends: DXY rises on the back of strong economic performance

  • Nonfarm payrolls increased by 272,000 in May, beating market expectations of 185,000 and marking a significant increase from April’s revised figure of 165,000.
  • The unemployment rate rose slightly from 3.9% to 4%.
  • Wage inflation data, measured as the percentage change in average hourly wages, rose to 4.1% year-on-year, up from a revised 4% in April.
  • Meanwhile, government bond yields continued to trend upwards, with the two-year, five-year and 10-year bond yields rising by more than 2 percentage points to 4.85%, 4.44% and 4.41%, respectively.

DXY technical analysis: Index recovers key levels, bullish reversal underway

The upside for the DXY Index is becoming more evident as it has risen above the key Simple Moving Averages (SMA) of 20,100 and 200. The Relative Strength Index (RSI) is again above 50, indicating a return to bullish momentum, while the Moving Average Convergence Divergence (MACD) continues to display lower red bars, suggesting increased buying interest.

To sustain the bullish outlook, DXY bulls need to hold the key resistance level at 104.40, which was reclaimed after the strong employment data.

Frequently asked questions about the Nonfarm Payrolls Report

Nonfarm Payrolls (NFP) is part of the U.S. Bureau of Labor Statistics’ monthly employment report. Nonfarm Payrolls specifically measures the change in the number of people employed in the United States, excluding agriculture, during the previous month.

Nonfarm payrolls can be an indicator of how well the Federal Reserve is fulfilling its mission of promoting full employment and 2% inflation, and can influence Federal Reserve decisions. A relatively high nonfarm payroll number means more people are employed, earn more, and therefore probably spend more. On the other hand, a relatively low nonfarm payroll result means people are having a hard time finding work. The Federal Reserve typically raises interest rates to combat high inflation caused by low unemployment and lowers interest rates to stimulate a stagnant labor market.

Nonfarm payrolls are generally positively correlated with the US dollar, meaning that when payrolls are higher than expected, the US dollar tends to strengthen, and vice versa when payrolls are lower. Nonfarm payrolls affect the US dollar because they influence inflation, monetary policy expectations, and interest rates. Higher nonfarm payrolls usually mean the Federal Reserve will tighten monetary policy, supporting the US dollar.

Nonfarm payrolls are generally negatively correlated with gold prices, meaning that higher than expected payrolls have a negative impact on gold prices and vice versa. Rising nonfarm payrolls generally have a positive impact on the value of the US dollar, and like most major commodities, gold is priced in US dollars. Thus, as the value of the US dollar rises, fewer US dollars are needed to purchase an ounce of gold. Rising interest rates (usually driven by rising nonfarm payrolls) also make gold less attractive as an investment compared to holding it in cash, which at least earns interest.

Nonfarm payrolls are only one component of a larger employment report and can be overshadowed by other components. Sometimes, when nonfarm payrolls are higher than expected but average weekly earnings are lower than expected, the market ignores the potential inflationary effect of the headline result and interprets the decline in earnings as deflationary. Labor force participation and average weekly hours can also influence market reactions, but only in rare events such as the “Great Resignation” or the Global Financial Crisis.

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