US Dollar edges higher as strong data fuel US Treasury yields

  • DXY Index stands positively at 104.95, reflecting a noticeable gain for the day.
  • Investors focus on incoming data amidst speculation of an easing cycle commencing in June.
  • ISM PMI readings from March beat expectations.
  • Markets await Nonfarm Payrolls, Average Hourly Earnings, and Unemployment Rate from March to gauge insights into the economy’s health. 

The US Dollar Index (DXY) trades at 104.95 on Monday morning, reflecting some gains. The strong ISM business activity report from March, showing the highest growth since September 2022, could discourage the Federal Reserve (Fed) from rushing to the start of the easing cycle. Labor market data to be released later this week will shape expectations.

The US economy appears steady with the Fed’s stance treading a cautious path. Despite upward revisions in inflation projections, the Fed, under Powell’s guidance, refrains from overreacting to short-term spikes in inflation. The speculated start of an easing cycle in June remains dependent on incoming data. 

Daily digest market movers: DXY buoyed by robust business activity, hawkish Fed bets

  • Institute for Supply Management (ISM) report shows business activity for March improved for the first time since September 2022, indicating a robust economy.
  • Manufacturing Purchasing Managers Index (PMI) hit 50.3 in March, surpassing projected figures of 48.4 and appreciably exceeding February’s reading of 47.8. 
  • ISM report’s Prices Paid Index rose to its highest level of 55.8 YoY since 52.5 in August 2022.
  • An improving economy might discourage the Fed from relaxing its monetary policy.
  • As a reaction to ongoing US economic resilience, the odds for a rate cut in June’s meeting dropped from 85% to around 65%.
  • In the bond market, US Treasury bond yields surged. The 2-year yield is at 4.71%, the 5-year yield at 4.33%, and the 10-year yield at 4.33%, all showing sharp increases and reflecting a boost in hawkish bets.
  • Pertinent US labor market data such as Average Hourly Earnings, Nonfarm Payrolls, and the Unemployment Rate will provide a vital understanding of the health and trends of the country’s workforce.
  • On Tuesday, several Fed officials will be on the wires.

DXY technical analysis: DXY bears recede, bulls gain control

The technical indicators on the daily chart reflect an increasing buying momentum for DXY. The Relative Strength Index (RSI) is in positive territory and exhibits a positive slope, which is generally known as a bullish signal. Furthermore, the Moving Average Convergence Divergence (MACD) indicators display rising green bars, amplifying the emphasis on bullish momentum.

Additionally, the index position above the 20, 100, and 200-day Simple Moving Averages (SMAs) adds arguments for a positive technical outlook for the USD.

Employment FAQs

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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