Dollar Bulls Hoping for Some Succour from NFP

Written on 01/06/2022 by Lukman Otunuga, Senior Research Analyst at FXTM

The constant tug of war between inflation concerns and slowing growth is proving for the most part, a heavy burden on risky assets. Meanwhile, the dollar is trying to stabilise as it heads into the main data point of the week, the monthly US non-farm payrolls data.

Although US employment does look to be losing momentum, growth is still relatively healthy, consistent with a further drop in the unemployment rate. The headline print is forecast at 317k in May, down from 428k the previous month. The jobless rate is expected to have fallen to 3.5%, its lowest point since February of 2020. Revisions to the previous headline numbers will also be a focus as the employment forecasts for three of the previous four months have been well below the reported figures.

The main issue will most likely be the lack of workers with nearly double the number of vacancies for every unemployed American. This tight labour market means that robust wage growth is likely, with the average hourly earnings month-on-month number estimated at 0.4%. We will get an update on vacancies with today’s JOLTS report which is forecast to show a slight decline to 11.3mn in April from the 11.5mn figure in March.

Slowing jobs growth going forward?

Another hot employment report could give a boost to the greenback after investors recently lowered their expectations of how high the Federal Reserve will hike rates this year. Markets have fully priced in two more 50bp rate rises for June and July, but what happens after the summer is the interesting question. A split seems to be developing at the FOMC between those wanting to reassess the data before September and more hawkish officials who wish to continue with 50bp hikes to make sure inflation is brought under control.

Employment growth may slow further going forward, especially as policy tightening takes effect. With rising inflation, participation might also strengthen, marking out the jobless rate at 3.5% a potential low for the cycle. Wage growth too may increase at less than the rate of inflation. This means real incomes will fall through the year.

USD holding onto support

The greenback has fallen since hitting twenty-year highs in mid-May. The Fed tightening narrative has taken a hit while other countries play catch up to raise rates. Slightly improved risk sentiment has also encouraged traders to buy cyclical, growth currencies as commodity prices rebound higher. The DXY has bounced off the 50-day simple moving average at 101.51. It hasn’t traded under this since February so will act as strong initial support. The key psychological 100 market sits below.

For more information, please visit: FXTM

Disclaimer: This written/visual material is comprised of personal opinions and ideas. The content should not be construed as containing any type of investment advice and/or a solicitation for any transactions. It does not imply an obligation to purchase investment services, nor does it guarantee or predict future performance. FXTM, its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness of any information or data made available and assume no liability for any loss arising from any investment based on the same.