US Dollar rebounds on impressive US jobs report for May

• US Dollar managed to stage a modest rebound following Thursday's selloff.
• US Dollar Index stays below 104.00 and looks to snap a three-week winning streak.
• Impressive May jobs data from US helped US Dollar limit its weekly losses.

The US Dollar (USD) has managed to gather some strength against its major rivals in the early American session on Friday. The US Dollar Index, which tracks the USD's valuation against a basket of six major currencies, clings to daily gains above 103.50 but remains on track to end the week in negative territory.

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. With the immediate reaction, the USD found its footing but struggled to gather bullish momentum. 

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%.

Daily digest market movers: US Dollar recovers ahead of the weekend

• 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 rose toward 3.5% on impressive jobs report. Nevertheless, the CME Group FedWatch Tool shows that markets are still pricing in a nearly 70% probability of the US Federal Reserve (Fed) leaving its policy rate unchanged at the upcoming meeting.
• The economic activity in the US manufacturing sector continued to contract at an accelerating pace in May with the ISM Manufacturing PMI dropping to 46.9 from 47.1 in April. This reading came in worse than the market expectation of 47. More importantly, the inflation component of the PMI survey, Prices Paid Index, fell sharply to 44.2 from 53.2, compared to analysts' estimate of 52.
• The data published by Automatic Data Processing (ADP) showed on Thursday that private sector employment in the US rose by 278,000 in May. This reading surpassed the market expectation of 170,000 by a wide margin. Underlying details of the publication revealed that the annual wage inflation for 'job stayers' declined to 6.5% from 6.7% in April.
• The US Bureau of Labor Statistics revised the change in Unit Labor Costs for the first quarter lower to 4.2% from 6.3% in the advanced estimate.
• Other data from the US revealed that there were 232,000 initial claims for unemployment benefits in the week ending May 27, compared to 230,000 in the previous week.
• Philadelphia Fed President Patrick Harker noted on Wednesday and Thursday that he was leaning toward a pause in rate hikes in June but noted that incoming data may change his mind.
• Federal Reserve Governor Philip Jefferson said that pausing rate hikes at the next FOMC meeting would offer time to analyse more data before making a decision about the extent of additional tightening. 
• The House of Representatives passed a bill to suspend the debt limit through January 1, 2025. The Senate approved this bill on Thursday. US President Joe Biden is expected to sign the bill into law on Friday.
• The US Bureau of Labor Statistics reported on Wednesday that the number of job openings on the last business day of April stood at 10.1 million, compared to 9.74 million in March. This reading came in higher than the market expectation of 9.37 million and provided a short-lasting boost to the USD.
• In an interview with the Financial Times, Cleveland Federal Reserve (Fed) Bank President Loretta Mester said that she doesn't necessarily see a compelling reason for pausing rate increases amid a "really embedded, stubborn inflationary pressure.”
• Consumer sentiment in the US weakened slightly in May with the Conference Board's (CB) Consumer Confidence Index edging lower to 102.3 from 103.7 in April (revised from 101.3). The Present Situation Index declined to 148.6 from 151.8 and the Consumer Expectations Index stayed virtually unchanged at 71.5. Finally, the one-year consumer inflation expectations ticked down to 6.1% in May from 6.2% in April.

Technical analysis: US Dollar Index struggles to turn bullish

The US Dollar Index (DXY) broke below 104.00 on Thursday, where the Fibonacci 23.6% retracement of the November-February downtrend is located. On the downside, 103.00 (100-day SMA) aligns as critical support. A weekly close below that level could bring in additional sellers and open the door for an extended decline toward 102.40 (50-day SMA) and 102.00 (psychological level). where the 100-day Simple Moving Average (SMA) and the 20-day SMA meet.

On the flip side, DXY could gather bullish momentum and rise toward 104.50 (static level) and 105.00 (psychological level) if it manages to rise above 104.00 and use that level as support.

What is US Dollar Index (DXY)?

The US Dollar Index, also known as DXY or USDX, is a benchmark index that was established by the US Federal Reserve in 1973. DXY is widely used as a tool measuring the US Dollar (USD) value in global markets. The index is calculated by measuring the US Dollar’s performance against a basket of six foreign currencies, the Euro, the Japanese Yen (JPY), Swedish Krona (SEK), the British Pound (GBP), the Swiss Franc (CHF) and the Canadian Dollar (CAD).

With 57.6%, the Euro has the biggest weight in the index followed by the JPY (13.6%), GBP (11.9%), CAD (9.1%), SEK (4.2%), and CHF (3.6%). Hence, a sharp decline in the EUR/USD pair could help the US Dollar Index rise even if the US Dollar weakens against some of the other currencies in the basket.