- The DXY Index sees upward movements threatening the 20-day SMA near the 104.00 level.
- The US service sector expanded in November, according to the ISM.
- Investors keenly await the Unemployment Rate and Nonfarm Payrolls reports due this Friday.
The US Dollar (USD), gauged by the US Dollar Index (DXY), is edging higher, currently trading near 104.00 while posing a threat to the 20-day SMA at 104.05. This movement has been largely attributed to releasing a better-than-expected Institute for Supply Management (ISM) Services PMI for November.
Meanwhile, investors are focusing on key employment figures due for release this Friday – specifically the November Unemployment Rate and Nonfarm Payrolls data – as they could suggest further directional moves for the greenback.
Despite cooling inflation in the US economy and mixed labor market and economic activity signals, the Federal Reserve (Fed) continues to refrain from ruling out further policy tightening. This somewhat hawkish stance coincides with the release of key labor data this week, which could dramatically shift market expectations.
Daily Market Movers: US Dollar gains momentum with boost from strong ISM Services PMI
- US Dollar trades with a strong note on Tuesday, threatening the 20-day SMA near the 104.00 mark.
- The Institute for Supply Management’s November report revealed the ISM Services PMI exceeded consensus and previous figures by coming in at 52.7, further propelling the US Dollar’s advance.
- The latest report from US Bureau of Labor Statistics indicated that October JOLTs Job Openings fell by nearly 600K to 8.733 million. This figure was well below the consensus of 9.35 million.
- Looking ahead, important upcoming economic releases include the Unemployment Rate, Nonfarm Payrolls, and Average Hourly Earnings on Friday. These figures will hold significant implications for investors and the US Dollar’s trajectory as they could shape the next Fed decisions.
- Current market expectations from the CME FedWatch Tool indicate that a no hike is priced in for the December meeting and that markets are now pricing in rate cuts for mid 2024.
Technical Analysis: US Dollar bullish momentum strengthens, buyers threaten the 20-day SMA
The indicators on the daily chart clearly depict a strengthening of bullish momentum for the US Dollar. Although in negative territory, the Relative Strength Index (RSI) shows a positive slope, while the Moving Average Convergence Divergence (MACD) is printing rising green bars, offering confirmation of prevailing bullish strength.
Evaluating the longer-term scenario, the index is currently positioned beneath the 20 and 100-day Simple Moving Averages (SMAs) but above the 200-day SMA. This means that overall, whilst experiencing some pressure in the short-term, bulls persistently show their presence in the broader picture. That picture hints at a firm upward trajectory. In case buyers advance and conquer the 20-day SMA, further green may be seen in the short term.
Support levels: 103.60, 103.30, 103.15, 103.00.
Resistance levels: 104.10 (20-day SMA), 104.40 (100-day SMA), 104.50.
Labor market conditions are a key element to assess the health of an economy and thus a key driver for currency valuation. High employment, or low unemployment, has positive implications for consumer spending and thus economic growth, boosting the value of the local currency. Moreover, a very tight labor market – a situation in which there is a shortage of workers to fill open positions – can also have implications on inflation levels and thus monetary policy as low labor supply and high demand leads to higher wages.
The pace at which salaries are growing in an economy is key for policymakers. High wage growth means that households have more money to spend, usually leading to price increases in consumer goods. In contrast to more volatile sources of inflation such as energy prices, wage growth is seen as a key component of underlying and persisting inflation as salary increases are unlikely to be undone. Central banks around the world pay close attention to wage growth data when deciding on monetary policy.
The weight that each central bank assigns to labor market conditions depends on its objectives. Some central banks explicitly have mandates related to the labor market beyond controlling inflation levels. The US Federal Reserve (Fed), for example, has the dual mandate of promoting maximum employment and stable prices. Meanwhile, the European Central Bank’s (ECB) sole mandate is to keep inflation under control. Still, and despite whatever mandates they have, labor market conditions are an important factor for policymakers given its significance as a gauge of the health of the economy and their direct relationship to inflation.
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