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- US Dollar retreated after posting solid gains in recent weeks.
- Nonfarm Payrolls increased by 12,000 in October, falling short of market expectations.
- Markets remain almost fully pricing in a 25 bps cut by the Fed next week.
The US Dollar Index (DXY), which measures the value of the USD against a basket of six currencies, rebounded intraday despite the weak jobs data as annual wage inflation rose to 4%, indicating that inflationary pressures remain elevated. In the meantime, markets remain almost fully expecting a 25 basis-point-cut by the Federal Reserve (Fed) next week. On the data front, ISM PMIs also came in mixed from September.
The DXY continues to trade sideways near 104.00. Despite persistent inflation, weak job growth data raises expectations of a less hawkish Fed stance, which might start to weaken the USD.
Daily digest market movers: US Dollar recovers after NFPs
- Nonfarm Payrolls in the US rose by a mere 12,000 in October, significantly missing market expectations of 113,000.
- The Unemployment Rate remained unchanged at 4.1%, in line with expectations.
- Wage inflation, as measured by Average Hourly Earnings, rose to 4% from 3.9%.
- Business activity in the US manufacturing sector continued to contract at a faster pace in October, with the ISM Manufacturing PMI dropping to 46.5 from 47.2 in September. This figure came in below the market expectation of 47.6.
- The Services PMI rose to 54.9 in October, indicating a strong expansion in the US service sector.
- Markets are pricing in a 25 bps cut by the Fed next week and an 85% chance of another 25 bps cut in December.
DXY technical outlook: DXY consolidating, finds support the 200-day SMA
The index retested the 200-day Simple Moving Average (SMA) support at 104.15 and buyers successfully defended it. The Relative Strength Index (RSI) is pointing down, still near overbought territory, and the Moving Average Convergence Divergence (MACD) is printing lower green bars, indicating bearish momentum. In that sense, if buyers show resilience it may present better around the mentioned SMA.
Key support levels include 104.15, 104.05, and 104.00, while resistance is encountered at 104.70, 104.90, and 105.00. Traders monitor these levels closely for breakout opportunities.
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.