US Dollar becomes two-faced as data points contradict each other

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  • US Dollar price action steadies after PCE data as both core and overall inflation fall in line of expectations. 
  • Initial and continuing claims point to a still strong jobs market. 
  • The US Dollar Index able to avoid a meltdown as PCE pushes back against weak data earlier this week. 

The US Dollar (USD) turns two-faced after US Gross Domestic Product (GDP) and JOLTS decline issued alarm signals on the healthiness of the US economy and favored a weaker Greenback. Though, it does not look to be a one way street, with the several data points this Thursday giving some arguments in favor of a stronger US Dollar. First and foremost, the US Personal Consumption Expenditures (PCE) numbers were in line with expectations and are still positive for the month, which proves that the US Federal Reserve (Fed) is right in its assessment not to start cutting soon.

Another counterargument in order not to start cutting that quickly comes with the continuing and initial jobless claims, which were still quite low. The initial jobless number is even contracting a bit, which means that companies are reluctant to let go of the excess workforce. So the demand for workforce might be slowing down a touch, the labor force as such is still seeing steady headcount stability or an increase, which means that inflation pressures will remain sticky for the next couple of months with plenty of Americans still earning money and have the ability to spend it.

Daily digest: US Dollar halts downturn

  • Traders are valueing EUR/USD around 1.0850 in the middle of the weekly range ahead of the US nonfarm payrolls on Friday. 
  • The White House asks Congress for a short-term extension of goverment funding in order to avert a shutdown during budget talks. 
  • Ahead of the US non-farm payrolls, Canadian payrolls rose 47.7K, from 129.9K.
  • The print of the Personal Consumption Expenditures (PCE) came in perfectly in line of expectations: The overall index stayed steady at 0.2% for the monthly performance, and jumped from 3% to 3.3% on a yearly basis. The core PCE for the month remained steady as well at 0.2%, while the core yearly index headed from 4.1% to 4.2%. 
  • Additionally, the Weekly Continuing and Initial Jobless Claims will came out at the same time with PCE: the Initial Claims went lower from 230K to 228K and the Continuing Claims nudged higher from 1.702M to 1.725M.
  • After a few days of silence, markets will get to hear from the Fed with Susan Collins from the Boston Fed due to speak at 13:00 GMT.
  • To close off the eventful day of economic data, the Chicago Purchasing Managers’ Index for August came out at 13:45 GMT. The previous number was 42.8, and got beaten by an uptick to 48.7. Though still in contraction, the number was better than expected.
  • A very mixed trading day in the equity markets with Japan closing up 0.80%. Yet the Hong Kong Hang Seng Index is down 0.55%. Overall, European equities are roughly flat, and US equities are having difficulties chosing a direction.
  • The CME Group’s FedWatch Tool shows that markets are pricing in an 88.5% chance that the Federal Reserve will keep interest rates unchanged at its meeting in September. The prior 78% probability was quickly reassessed after the downbeat data from the JOLTS report. 
  • The benchmark 10-year US Treasury bond yield trades at 4.10% and is quickly losing steam as markets move forward those possible rate cuts from the Fed. 

US Dollar Index technical analysis: Friday could go either way

The US Dollar is in a technical recovery this morning, off the weekly lows against most major G10 peers. This could be short-lived as the current uptick is only based on the support of the 200-day Simple Moving Average at 103.08 in the US Dollar Index (DXY). In case that technical element is breached again, more substantial US Dollar devaluation could be in the cards. 

On the upside, 103.69, the high of August 30, comes into play as the level to beat in order to halt this downturn. Once that level is broken and consolidated, look for a surge to 104.00, where 104.35 (the peak of August 29) is an ideal candidate for a double top. Should the Greenback go on a tear, expect a test at 104.47 – the six-month high.

On the downside, the summer rally of the DXY is set to be broken as only one element now supports the US Dollar. That is the 200-day SMA, and it could mean substantially more weakness to come once the DXY starts trading further below it. The double belt of support at 102.35 with both the 100-day and the 55-day SMA are the last lines of defence before the US Dollar sees substantial and longer term devaluation. 

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.

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