US Dollar soft ahead of NFPs

• US Dollar continues struggling as buyers take a breather.
• US PCE Prices Index fell to 2.1% yearly in September, while the core inflation remains steady at 2.7%.
• US Jobless Claims fall to 216K, against market expectations of an increase to 230K.

The US Dollar Index (DXY) trades softer on Thursday despite persistent inflation in the United States, as measured by the Personal Consumption Expenditure (PCE) Prices Index. Additionally, the number of Initial Jobless Claims decreased more than expected for the last week of October, but the Greenback continues struggling for traction in the latter half of the week.

The DXY index has displayed a mixed path amid conflicting economic data. Strong ADP Employment Change figures and upwardly revised September ADP data were offset by downwardly revised Q3 GDP growth. The upcoming Nonfarm Payrolls (NFP) report on Friday could significantly impact the DXY's direction.

Daily digest market movers: US Dollar eases on profit-taking despite strong data

• The US PCE Prices Index rose moderately by 2.1% YoY in September, lower than the previous 2.2% but below the consensus of 2.2%.
• Core PCE, more relevant for the Fed, remained steady at 2.7%, against market expectations of a decline to 2.6%.
• Despite market consensus expecting an increase to 230K, Initial Jobless Claims fell to 216K in the week of October 25.
• Economists predict the the NFP to hit 113K new payrolls in October, significantly lower than September's 254K. The Unemployment Rate is anticipated to remain unchanged at 4.1%.
• Market participants will closely monitor employment data for insights into the Fed's interest rate decision-making.
• As for now, markets are expecting a 25 bps cut at next week’s Federal Open Market Committee meeting next week.

DXY technical outlook: DXY index consolidates near 104.50 support

The DXY index remains consolidating, possibly preparing to retest the 200-day SMA support at 103.50. The Relative Strength Index (RSI) remains elevated near overbought territory but is trending down. The Moving Average Convergence Divergence (MACD) indicator is generating smaller green bars, indicating a weakening momentum.

Supports: 104.50, 104.30, 104.00Resistances: 104.70, 104.90, 105.00

Nonfarm Payrolls FAQs

What are Nonfarm Payrolls?

Nonfarm Payrolls (NFP) are part of the US Bureau of Labor Statistics monthly jobs report. The Nonfarm Payrolls component specifically measures the change in the number of people employed in the US during the previous month, excluding the farming industry.

How does Nonfarm Payrolls influence the Federal Reserve monetary policy decisions?

The Nonfarm Payrolls figure can influence the decisions of the Federal Reserve by providing a measure of how successfully the Fed is meeting its mandate of fostering full employment and 2% inflation. A relatively high NFP figure means more people are in employment, earning more money and therefore probably spending more. A relatively low Nonfarm Payrolls’ result, on the either hand, could mean people are struggling to find work. The Fed will typically raise interest rates to combat high inflation triggered by low unemployment, and lower them to stimulate a stagnant labor market.

How does Nonfarm Payrolls affect the US Dollar?

Nonfarm Payrolls generally have a positive correlation with the US Dollar. This means when payrolls’ figures come out higher-than-expected the USD tends to rally and vice versa when they are lower. NFPs influence the US Dollar by virtue of their impact on inflation, monetary policy expectations and interest rates. A higher NFP usually means the Federal Reserve will be more tight in its monetary policy, supporting the USD.

How does Nonfarm Payrolls affect Gold?

Nonfarm Payrolls are generally negatively-correlated with the price of Gold. This means a higher-than-expected payrolls’ figure will have a depressing effect on the Gold price and vice versa. Higher NFP generally has a positive effect on the value of the USD, and like most major commodities Gold is priced in US Dollars. If the USD gains in value, therefore, it requires less Dollars to buy an ounce of Gold. Also, higher interest rates (typically helped higher NFPs) also lessen the attractiveness of Gold as an investment compared to staying in cash, where the money will at least earn interest.

Sometimes Nonfarm Payrolls trigger an opposite reaction than what the market expects. Why is that?

Nonfarm Payrolls is only one component within a bigger jobs report and it can be overshadowed by the other components. At times, when NFP come out higher-than-forecast, but the Average Weekly Earnings is lower than expected, the market has ignored the potentially inflationary effect of the headline result and interpreted the fall in earnings as deflationary. The Participation Rate and the Average Weekly Hours components can also influence the market reaction, but only in seldom events like the “Great Resignation” or the Global Financial Crisis.

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