U.S. Dollar is Well Supported by Jobs Data

Intermediate
  • Dollar bulls are indicating a positive technical sentiment
  • The jobs data for June has diminished the chances of too loose a Fed policy
  • The U.S. economy is coping ith trade disputes
  • Target the USD Index to dip, before rallying beyond its current channel

The U.S. Dollar rose on Friday to a three-week high when it was reported that the American economy added more jobs than had been expected in June.

Nonfarm payrolls rose by 224,000 in the past month, well above consensus expectations for 160,000 and a sharp rebound from a downwardly revised 72,000 in May. Wage growth remains strong, at above 3% year-over-year, for the 11th month in a row, as a tight labour market forces employer to bid more for work-force supply and to share more of the wealth generated by solid Trump-era GDP growth.

The Dow dipped on the good news closing 43.88 or 0.16% lower. How curious is it that strong numbers that imply better growth should lead the equity market lower! This is a sign of the times in that short-term stock market movements are not just about the economy’s strength.

What drove the equity market lower and the Dollar higher is the fact that the data means the Federal Reserve is now less likely to deliver an immediate interest rate cut.

In late New York trading, the EURUSD fell to 1.1221 and GBPUSD fell to 1.2526. The rate for AUDUSD fell to 0.6979 dollar from 0.7020.

This must be taken quite well as in the round it shows the broad economy is currently shrugging off the U.S.-China trade uncertainty.  Trade pressure has led the Fed to open the door at its last policy meeting for a rate cut to mitigate the effects of the trade disputes between the U.S and China as well as the EU. It was expected to cut rates by 25 basis points in July, with traders expecting a total of three rate cuts this year.

Maybe, it was just a knee-jerk reaction, but the resilience of the U.S. jobs market is a key determinant to sense that rate policy is leaning towards more modest Fed policy loosening relative to market expectations.

US Dollar Index September 2019

Source: www.tradingeconomics.com , Spotlight Ideas

The chart above shows the U.S. Dollar Index (DX) as enjoying a good run inside an impulsive since June 23. The rotation in the channel might suggest that the immediate move from here would be lower, perhaps to 96.22.

Tuesday, July 9 will see a raft of talking heads from the Fed on the circuit. These ill include the Fed Chair, Jerome Powell at 13:45 BST.

Then on Wednesday, July 10 Fed Chair Jerome Powell is to testify on the economic outlook and recent monetary policy actions before the Joint Economic Committee, in Washington DC. The testimony is in two parts; the first is a prepared statement, then the committee conducts a question and answer session. The Q&A portion of the testimony can see heavy market volatility for the duration.

I am not to worried about the June readings in CPI and PPI at the back end of the week as from my perspective, the only genuine inflation in the U.S. is in asset prices.

Following a dip to the middle of the trading channel (see chart above) I would be inclined to be long of the Dollar.

Summary:

Buy a dip down to 96.50

Target 1 97.15

Stop at 96.25

Stephen Pope

Macroeconomic Strategist

Stephen Pope is the Managing Partner of Spotlight Group. He has worked in the world of finance since 1982 and has performed d...continued

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