Introduction to the US Dollar Index
The US Dollar Index (DXY) has been making a recovery in the American session on Thursday, following the latest release of US employment data. This data highlighted a resilient labor market, which has a direct impact on monetary policy.
US Employment Data Surprises to the Upside
The US Nonfarm Payrolls report showed that the US economy added 149K jobs in June, surpassing analyst estimates of 110K. The unemployment rate also fell to 4.1% from 4.2%, while economists had projected it to increase to 4.3%. Weekly Initial Jobless Claims numbers decreased, easing concerns over the health of the labor market and reducing the potential for a July interest-rate cut.
Impact on Interest Rates and US Yields
Prior to the release of the June employment data, the CME FedWatch Tool indicated that markets were pricing in a 25.3% probability of a 25-basis-point (bps) rate cut in July. However, those numbers have been reduced significantly, with markets now pricing in a mere 4.7% chance of a July cut. The prospects of higher interest rates make US yields more attractive, boosting demand for the US Dollar.
DXY Recovers and Trades Above 97.00
The DXY has been trading above 97.00, with momentum indicators reflecting an increase in bullishness. The 97.00 psychological level now serves as near-term resistance, with support at the 20-period Simple Moving Average (SMA) at 96.83. A break of this level could open the door for a potential retest of the year-to-date low of 96.38.
Technical Analysis of DXY
The Relative Strength Index (RSI) on the four-hour chart is nearing 57, reflecting a surge in bullish momentum without entering overbought territory. If the uptrend manages to gain traction above the 50-period SMA at 97.33, the 23.6% Fibonacci retracement level of the May-July decline could come into play at 97.70. Above that, there is the 98.00 psychological level and the 38.2% Fibo level at 98.52.
Importance of Labor Market Conditions
Labor market conditions are a key element in assessing 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.
How Central Banks Respond to Labor Market Conditions
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. Central banks around the world pay close attention to wage growth data when deciding on monetary policy.
Conclusion
In conclusion, the US Dollar Index has recovered following the release of positive US employment data. The data has reduced the chances of a July interest-rate cut, making US yields more attractive and boosting demand for the US Dollar. The DXY is trading above 97.00, with momentum indicators reflecting an increase in bullishness. As labor market conditions continue to be a key driver for currency valuation, central banks will closely monitor wage growth data when deciding on monetary policy.
