The US dollar’s recent performance has been characterized by its continued strength, which has persisted overnight and intensified since the end of the previous week.
This has led to the dollar index approaching its peak from last month, specifically reaching a level of 104.45 as of August 25th. Additionally, the index is in proximity to the intra-day high recorded on May 31st at 104.70, and a breakthrough at this level could potentially pave the way for a further rebound of the US dollar, targeting the year-to-date high recorded on March 8th at 105.88.
The US dollar’s rally on Friday marked the seventh consecutive week of gains for the dollar index, following its year-to-date low of 99.58 on July 14th. The price action continues to favour a bullish outlook for the US dollar in the short term.
Notably, this momentum persisted even after the release of a non-farm payrolls report on Friday, which indicated a greater-than-expected slowdown in US employment and wage growth.
This report further strengthened the expectation that the Federal Reserve would maintain its current interest rates in September.
The report revealed that employment growth has averaged 150,000 jobs per month over the last three months, reflecting a more pronounced deceleration compared to the average of 287,000 jobs per month in the first five months of the year.
This slower pace of job creation provides the Federal Reserve with more confidence in the softening demand for labour.
Simultaneously, there was evidence of an increase in labour supply, which is contributing to a reduction in upward risks to the inflation outlook stemming from the labour market. According to the household survey, the labour force expanded by 736,000 in August, and the number of unemployed individuals increased by 514,000.
Presumably, those re-entering the labour force are encountering challenges in finding new employment due to the slowing hiring activity. As a result, the unemployment rate climbed from 3.4% in January to 3.8% in August.
These more balanced dynamics between labour supply and demand are expected to alleviate upward pressure on wage growth. In August, average hourly earnings growth slowed to 0.2%, following a couple of stronger months.
Overall, the non-farm payrolls report provided a reassuring outlook for the Federal Reserve, strengthening the case for concluding its rate-hiking cycle.
This is particularly relevant since interest rates have already been elevated significantly, and inflationary pressures are showing signs of moderation. The US rate market has grown more confident in the expectation that rates will remain unchanged for the remainder of the year, although there is hesitancy to anticipate further rate cuts in the coming year, given that more than 100 basis points in cuts have already been factored into pricing.
The US dollar’s resilience in the face of the weaker non-farm payrolls report may be attributed to two factors: first, the relative strength of the US economic outlook compared to weaker growth prospects outside the US; and second, the possibility that the non-farm report has not yet reached a level of weakness that would significantly bolster expectations of more aggressive rate cuts by the Federal Reserve in 2024.
Market commentary and analysis from Luca Santos, currency analyst at ACY Securities
