The US Dollar Index (DXY) is trading mildly higher at 105.80. The Greenback's modest upward momentum comes despite Federal Reserve (Fed) Chair Jerome Powell's cautious remarks on inflation and its uncertain future trajectory. Ahead of Nonfarm Payrolls on Friday, weekly Jobless Claims figures seem to be benefiting the USD.
The US economy has seen substantial progress, according to the Fed, yet inflation remains worryingly high and its path uncertain. Although the Fed's restrictive measures have limited inflation and overheating, progress on inflation has slowed. Nonfarm Payrolls figures on Friday will provide additional guidance for markets on the state of the economy.
The DXY's technical outlook reflects a buying momentum, primarily driven by its position in relation to its Simple Moving Averages (SMAs). Even though the pair has a short-term negative outlook from the bearish tug of war with the bulls, it continues to trade above the 20,100 and 200-day Simple Moving Averages, which suggests a growing strength among the bulls.
The Moving Average Convergence Divergence (MACD) shown by the rising red bars suggests that the bears are advancing. At the same time, the Relative Strength Index (RSI) is in a flat position within positive territory. This indicates that the buying force is weakening while bears push downwards.
Labor market conditions are a key element to assess the health of an economy and thus a key driver for currency valuation. High employment, or low unemployment, has positive implications for consumer spending and thus economic growth, boosting the value of the local currency. Moreover, a very tight labor market – a situation in which there is a shortage of workers to fill open positions – can also have implications on inflation levels and thus monetary policy as low labor supply and high demand leads to higher wages.
The pace at which salaries are growing in an economy is key for policymakers. High wage growth means that households have more money to spend, usually leading to price increases in consumer goods. In contrast to more volatile sources of inflation such as energy prices, wage growth is seen as a key component of underlying and persisting inflation as salary increases are unlikely to be undone. Central banks around the world pay close attention to wage growth data when deciding on monetary policy.
The weight that each central bank assigns to labor market conditions depends on its objectives. Some central banks explicitly have mandates related to the labor market beyond controlling inflation levels. The US Federal Reserve (Fed), for example, has the dual mandate of promoting maximum employment and stable prices. Meanwhile, the European Central Bank’s (ECB) sole mandate is to keep inflation under control. Still, and despite whatever mandates they have, labor market conditions are an important factor for policymakers given its significance as a gauge of the health of the economy and their direct relationship to inflation.
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