The US Dollar is having a hard time holding on to its rank at the bottom of August’s trading range. Dropping out partly because of conflicting signals from the labor market and inflation data. As the ADP Employment Change report for August is set to be released on Thursday at 12:15 GMT, analysts are closely monitoring the potential impact of the report on the dollar’s value. The overall market consensus is a net increase of about 68,000 new US private sector payrolls in August. This comes after a strong increase of 104,000 jobs especially in July.
This new report will be critically important. Employment figures are at the greater heart of the Federal Reserve’s dual mandate of maintaining stable prices, and thereby inflation. Even Federal Reserve President Jerome Powell has acknowledged that these trade tariffs will likely have a strong one-time effect. This call-out only serves to further complicate the current economic climate we find ourselves in. An ADP report that misses expectation on the downside might urge the FOMC to accelerate its easing cycle. So as a direct response, this could result in a 50-basis-point cut.
US Dollar Index and Current Trends
The US Dollar Index (DXY) is our global measure of the dollar’s value, a comparison against the dollar’s most globally traded currency counterparts. Lately, though, it has jumped from four-week lows. Yet it is still under pressure, as the latest inflation numbers have allayed some fears of an uptick in price pressures. The dollar’s performance has been notably affected by the unexpected shock in the July Nonfarm Payrolls (NFP) data, which left market participants uncertain about future labor market conditions.
Most analysts believe that where the dollar goes from here will depend largely on wider market moods, influenced by key economic indicators to come. Guillermo Alcala, a FX analyst focused at FXstreet, acknowledged the important problem in the best way of bullish merchants. The bearish trendline resistance, now near 1.1730, coincides with the highs made in the middle of August, forming a double whammy for buyers.
“The confluence between the descending trendline resistance, now around 1.1730, and 1.1740, which encompasses the peaks of August 13 and 22, as well as Monday’s high, is likely to pose a serious challenge for bulls.” – Guillermo Alcala, FX analyst at FXstreet
These trends have included the dollar’s rejection around notable technical barriers, even if fundamentally these levels do not actively support the dollar.
Impact of Employment Figures on Monetary Policy
Fed’s focus on employment and inflation figures, sometimes referred to as the “dual mandate.” Particularly important will be the next ADP Employment Change report. It will have a powerful impact on shaping forecasts for the Federal Open Market Committee (FOMC) meeting on September 16 and 17. Any reading that underperforms market expectations might be the catalyst needed for the Fed to rethink its aggressive hold on interest rates and maintain their recent carry.
Industry analysts and advocates alike have rightly insisted that the state of employment is one of the bedrock components of the Federal Reserve’s dual mandate. Consumer spending accounts for two-thirds of American economic growth, making labor market conditions important if not indispensable to consider. As a result, any signs that point to a slowing pace of job creation will increase speculation about when the Fed may start to cut rates.
A disappointing ADP report will definitely dent confidence in the strength of the labor market. It might have the added benefit of pushing policymakers to act even more aggressively. Even more, the $2 trillion rate cut would be a dramatic change in the direction of monetary policy. This new provision has the potential to significantly shake up market dynamics.
Inflation Concerns Easing
In the past month, US inflation data have helped to calm fears of building inflationary fires. This realignment is largely positive for consumers and state public utility commissioners alike. It’s a good sign and perhaps an indication inflation is finally settling down after consistent month-to-month whiplash. We found that inflation trends super closely with shocks to economic fundamentals. This alignment matters tremendously when it comes to joint Federal Reserve decisions on national interest rates and monetary policy.
This tension between inflation and employment statistics makes for a confusing backdrop for economic decision-making. Analysts warn that the Federal Reserve will have to walk a tightrope as it tries to balance these closely related challenges. Global inflation pressures are clearly easing, as we noted last week. Any significant deterioration in employment data may cause the Fed to reconsider its course of action.
The dollar’s woes come as uncertainty reigns over the broader economy. As a very reactive monetary policy, it generally responds to real-time indicators of employment and inflation. The next ADP report will be a key one for gauging today’s labor market conditions. More importantly, it will become a critical determinant of what we should expect from future policy moves by the Federal Reserve.
“Euro bears are likely to face significant support at the bottom of the monthly range, between 1.1575 and 1.1590, which capped bears on August 11, 22, and 27.” – Guillermo Alcala, FX analyst at FXstreet