US Dollar recovers ground as strong NFP figures may delay rate cuts

• USD maintains its momentum, rising by more than 0.70% on Friday.
• US Nonfarm Payrolls exceeded market expectations in May, showing a robust recovery in the labor market.
• September odds fall for a Fed rate cut as positive economic signals abound.

On Friday, the US Dollar Index (DXY) expanded its winning streak following stronger-than-forecasted labor market data. The Nonfarm Payrolls, combined with an increase in wage inflation, outline a robust, resilient economy that may justify the delay of rate cuts by the Federal Reserve (Fed).

Attention now turns to future Fed meetings, with the market eyeing any shift in the monetary policy stance following the positive labor data. The odds for cuts for June and July remain low after the strong employment data, falling to around 50% for September.

Daily digest market movers: DXY strengthens, backed by solid economic results

• The Nonfarm Payrolls for May surged 272K, surpassing market projections of 185K and demonstrating substantial growth from April's revised figure of 165K.
• Unemployment Rate slightly crept higher to 4% from 3.9%.
• Wage inflation data, as indicated by the percentage change in Average Hourly Earnings, increased to 4.1% on a yearly basis, bouncing from the revised 4% in April.
• Meanwhile, Treasury yields followed the upward trajectory with the 2, 5 and 10-year rates climbing more than 2% to 4.85%, 4.44%, and 4.41%, respectively.

DXY technical analysis: A bullish reversal sets up as the index recovers key levels

A turnaround in the DXY index's fortune is becoming more apparent as it jumps above the key Simple Moving Averages (SMAs) of 20,100 and 200-days. The Relative Strength Index (RSI) shifted back above 50, signaling a return to bullish momentum, while the Moving Average Convergence Divergence (MACD) continues to print lower red bars, suggesting that buying interest is picking up.

For a sustained bullish outlook, the DXY bulls need to maintain the critical resistance level at 104.40, regained after the strong jobs data.

Nonfarm Payrolls FAQs

What are Nonfarm Payrolls?

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.

How does Nonfarm Payrolls influence the Federal Reserve monetary policy decisions?

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.

How does Nonfarm Payrolls affect the US Dollar?

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.

How does Nonfarm Payrolls affect Gold?

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.

Sometimes Nonfarm Payrolls trigger an opposite reaction than what the market expects. Why is that?

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.

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