- With the ADP and NFP releases, it will be another key week for the US labour market.
- The US private sector is expected to add 85K new jobs in June.
- The US Dollar Index navigates an area last seen in February 2022.
This week, the US labour market is set to take centre stage, adding to the combo of factors driving market sentiment as of late, namely mitigated geopolitical tensions in the Middle East, rising hopes of further progress on the trade front and prospects of the resurgence of Fed easing in Q3, as well as the renewed animosity from President Donald Trump toward Federal Reserve (Fed) Chair Jerome Powell.
Despite concerns about a potential economic slowdown in the US economy having not dissipated, they seem to have been put on the back burner for the time being.
The ADP Research Institute is poised to release its June Employment Change report on Wednesday, and it will explore the dynamics of private sector job gains.
The ADP survey is typically published a few days prior to the official Nonfarm Payrolls (NFP) data and is frequently viewed as an early indicator of potential trends that may be reflected in the Bureau of Labour Statistics (BLS) jobs report, although the two reports do not always align.
Employment, inflation, and Fed strategy
Employment serves as a fundamental element of the Federal Reserve’s dual mandate, in conjunction with the objective of maintaining price stability.
Recent months have indicated a tentative reduction in inflationary pressure, leading to a shift in focus toward the US labour market. This change follows the Fed’s consistent approach during its June 17–18 meeting and the recent relatively dovish comments made by Chair Powell in Congress.
Currently, market participants anticipate a 50-basis-point easing by the Fed in the latter half of the year, a possibility that could gain additional backing from certain Fed officials.
In light of the recent optimism regarding the White House’s trade strategy, coupled with a resilient economy and declining consumer price pressures, the forthcoming ADP report — especially Friday’s NFP report — has gained increased importance, likely influencing the Fed’s subsequent actions.
When will the ADP report be released, and how could it affect the US Dollar Index?
The ADP Employment Change report for June is set to be released on Wednesday at 12:15 GMT, with projections indicating an increase of 85K new jobs following May’s disappointing gain of 37K. The US Dollar Index (DXY) is currently adopting quite a negative position as it navigates multi-year troughs amid somewhat better conditions in trade and ongoing speculation regarding a potentially more accommodative Fed in the medium-term horizon.
If the ADP figures surpass expectations, they may alleviate some concerns regarding a potential economic slowdown, thereby supporting the Fed’s cautious approach. On the other hand, if the figures do not meet expectations, it could heighten concerns regarding the economy’s momentum, which may lead the Fed to reevaluate the timing of its easing cycle’s resumption.
Pablo Piovano, Senior Analyst at FXStreet, argued that when the multi-year trough at 96.37 (July 1) is broken, the index has the potential to reach the February 2022 floor of 95.13 (February 4), which is somewhat higher than the 2022 bottom of 94.62 (January 14).
“On the upside, we could expect to encounter some early resistance around the June ceiling of 99.42 (June 23), which is supported by the proximity of the provisional 55-day Simple Moving Average (SMA). Further up emerges the weekly top of 100.54 (May 29), which precedes the monthly high of 101.97 (May 12),” Piovano added.
He also highlights that as long as the index stays below its 200-day SMA at 103.78 and the 200-week SMA at 102.99, it is likely to continue its decline.
“Plus, momentum indicators are still leaning toward the negative side: the Relative Strength Index (RSI) has dropped to the oversold region around 28, and the Average Directional Index (ADX) is hovering above 17, so the trend isn’t exactly blazing with intensity,” Piovano concludes.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022.
Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system.
It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
Economic Indicator
Nonfarm Payrolls
The Nonfarm Payrolls release presents the number of new jobs created in the US during the previous month in all non-agricultural businesses; it is released by the US Bureau of Labor Statistics (BLS). The monthly changes in payrolls can be extremely volatile. The number is also subject to strong reviews, which can also trigger volatility in the Forex board. Generally speaking, a high reading is seen as bullish for the US Dollar (USD), while a low reading is seen as bearish, although previous months’ reviews and the Unemployment Rate are as relevant as the headline figure. The market’s reaction, therefore, depends on how the market assesses all the data contained in the BLS report as a whole.
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