- Traders remain alert to the effects of potential Chinese stimulus, although the US dollar’s upward trajectory appears firm on Thursday.
- Growing concerns about rising consumer prices sparked a mini-crisis in government bonds, boosting demand for the safe-haven US dollar.
- Firm labor market data, dovish FOMC minutes, and Friday’s December non-farm payrolls report support further dollar strength.
The US Dollar Index (DXY), which measures the value of the US dollar against a basket of currencies, has risen due to inflation issues, with the dollar holding steady at current levels. Concerns about inflation take hold and lead to a mini-crisis in UK bonds. The DXY is currently hovering around the 109.00 area, supported by strong demand amid continuing signs of monetary policy tightening. Now, investors’ eyes are on the US December Non-Farm Payrolls (NFP) report on Friday.
Daily summary of market drivers: The US dollar sees gains as markets evaluate the minutes of the Federal Open Market Committee meeting, and await the non-farm payrolls report
- Initial jobless claims fell to 201,000 in the week ending January 4, better than expectations of 218,000. Meanwhile, ADP reported 122,000 private sector jobs in December, lower than expectations.
- FOMC minutes highlight alternative assumptions on trade and immigration policies, with officials concerned about inflation likely taking longer to reach 2%. Most participants supported a 25 basis point cut in December, but upside inflation risks prompted policymakers to be cautious.
- US bond yields stabilized with 10-year bond yields hovering near 4.67%, while 30-year bond yields settled around 4.90% after a heavy auction week. Despite earlier tepid demand for 10-year bonds, 30-year bonds witnessed strong demand, reflecting investors’ resilience.
- Loose financial conditions continue with the Chicago Fed index falling for ten straight weeks, helping to stimulate growth as the Fed prepares for possible fiscal stimulus in the future.
- Markets brace for December nonfarm payrolls data on Friday, as investors expect clarity on labor market momentum and potential policy implications. The headline figure is expected to fall from 227,000 to 160,000.
DXY Technical Outlook: Indices maintain upward momentum but begin to flatten
The US Dollar Index defended its 20-day simple moving average (SMA), maintaining a constructive bias despite intermittent pullbacks. Technical indicators are still leaning towards the positive, although they appear to be flattening rather than accelerating further.
Key support is around 108.40, followed by 108.00 if bearish momentum picks up. As long as concerns about inflation and fixed yields persist, the dollar index may maintain its elevated stance near 109.00, albeit with narrower trading ranges in the near term.
Frequently asked questions about non-farm payrolls
Nonfarm Payrolls (NFP) are part of the monthly jobs report released by the U.S. Bureau of Labor Statistics. The nonfarm payrolls component specifically measures the change in the number of people employed in the United States during the previous month, excluding the agricultural industry.
The nonfarm payrolls number could influence the Fed’s decisions by providing a measure of how well the Fed is meeting its mandate of promoting full employment and 2% inflation. A relatively high NFP number means that more people are working, earning more money, and therefore likely spending more. On the other hand, a relatively low non-farm payrolls result may mean that people struggle to find work. The Fed typically raises interest rates to combat high inflation caused by low unemployment, then lowers them to stimulate a sluggish labor market.
In general, non-farm payrolls are positively correlated with the US dollar. This means that when salary numbers appear higher than expected, the US dollar tends to rise and vice versa when they are lower. Non-agricultural factors influence the US dollar by virtue of their impact on inflation, monetary policy expectations, and interest rates. A rise in non-farm payrolls usually means that the Fed will be more hawkish in its monetary policy, which supports the US dollar.
Nonfarm payrolls are generally negatively correlated with the price of gold. This means that higher than expected salary numbers will have a negative impact on the price of gold and vice versa. Rising non-farm payrolls generally have a positive impact on the value of the US dollar, and like most major commodities gold is priced in US dollars. If the US dollar rises in value, it will take fewer dollars to buy an ounce of gold. Higher interest rates (which have traditionally helped increase nonfarm payrolls) also reduce gold’s appeal as an investment compared to staying in cash, where the money will at least earn interest.
Nonfarm Payrolls are only one component within the larger payrolls report and can be overshadowed by others. Sometimes, when the US non-farm payrolls report is higher than expected, but average weekly earnings are lower than expected, the market has ignored the potential inflationary impact of the headline result and interpreted the earnings decline as deflationary. The components of the participation rate and average weekly hours can also influence the market reaction, but only in rare cases such as the “big resignation” or global financial crisis.