- US Dollar preserves its strength at the beginning of the week.
- US Dollar Index stays in positive territory above 104.00.
- ISM Services PMI report for May could influence US Dollar’s performance on Monday.
The US Dollar (USD) holds its ground to start the new week. The US Dollar Index (DXY), which tracks the USD’s valuation against a basket of six major currencies, stays in positive territory above 104.00 after having gained more than 0.5% on the back of the upbeat May jobs report from the US on Friday.
In the second half of the day, the USD’s valuation could be effected by the ISM’s Services PMI report for May. Markets expect the data to reveal an ongoing expansion in the service sector’s business activity, while forecasting another month of strong input inflation. It’s also worth noting that the US Census Bureau will release the Factory Orders data for April.
Daily digest market movers: US Dollar gathers strength on Monday
- The monthly data published by the US Bureau of Labor Statistics (BLS) showed on Friday that Nonfarm Payrolls rose 339,000 in May. This reading surpassed the market expectation of 190,000 by a wide margin. April’s reading of 253,000 also got revised higher to 294,000.
- Underlying details of the labor market report revealed that the Unemployment Rate climbed to 3.7% from 3.4% in the same period. The Labor Force Participation rate remained unchanged at 62.6%, while annual wage inflation, as measured by the change in Average Hourly Earnings, edged lower to 4.3% from 4.4%.
- Commenting on the US jobs report, “is the US economy experiencing a soft landing? According to the latest Nonfarm Payrolls, the job market is slowing down to a “Goldilocks level” – not too hot nor too cold,” said FXStreet Analyst Yohay Elam. “For markets, it means ongoing growth but with lower inflation and interest rates. For the US Dollar, it means the path of least resistance is down.”
- The benchmark 10-year US Treasury bond yield snapped a five-day losing streak after US jobs report and rose nearly 3% on Friday. The 10-year yield continues to stretch higher and stays in positive territory above 3.7% on Monday, providing a support to the USD.
- Despite rising US yields, the CME Group FedWatch Tool shows that markets are still pricing a more than 70% probability of the Federal Reserve (Fed) leaving its policy rate unchanged at the upcoming meeting.
- “There’s likely enough pockets of softness in this report for the FOMC to pass on raising rates at the next meeting, though another strong payrolls gain in June, coupled with another disappointing inflation report, could set the stage for a rate increase in July,” economists at the Bank of Montreal said regarding the potential impact of the labor data on the Fed’s policy outlook.
- US stock index futures trade mixed in the European session. On Friday, the S&P 500 Index gained more than 1% as markets cheered strong jobs figures.
Technical analysis: US Dollar Index holds above key technical support level
The US Dollar Index (DXY) broke above 104.00 on Thursday, where the Fibonacci 23.6% retracement of the November-February downtrend is located. Confirming the bullish tilt in the near-term technical outlook, The Relative Strength Index (RSI) indicator on the daily chart climbed above 60.
104.50 (static level) aligns as first resistance for DXY ahead of 105.00 (psychological level). A daily close above the latter could bring in additional buyers and open the door for an extended rebound toward 105.60 (Fibonacci 38.2% retracement, 200-day Simple Moving Average (SMA)).
On the downside, bearish pressure could increase if DXY drops back below 104.00. In that scenario, 103.50 (static level) could be seen as initial support before 103.00 (100-day SMA).
How is US Dollar correlated with US stock markets?
Stock markets in the US are likely to turn bearish if the Federal Reserve goes into a tightening cycle to battle rising inflation. Higher interest rates will ramp up the cost of borrowing and weigh on business investment. In that scenario, investors are likely to refrain from taking on high-risk, high-return positions. As a result of risk aversion and tight monetary policy, the US Dollar Index (DXY) should rise while the broad S&P 500 Index declines, revealing an inverse correlation.
During times of monetary loosening via lower interest rates and quantitative easing to ramp up economic activity, investors are likely to bet on assets that are expected to deliver higher returns, such as shares of technology companies. The Nasdaq Composite is a technology-heavy index and it is expected to outperform other major equity indexes in such a period. On the other hand, the US Dollar Index should turn bearish due to the rising money supply and the weakening safe-haven demand.
