Dollar bulls are disappointed
The US dollar kicked off the week slightly lower against its major peers having fallen heavily on Friday following May’s jobs report.
Signs of an overheating economy have sent the US currency higher for three consecutive days ahead of Friday’s jobs data.
The Institute of Supply Management showed that US manufacturing activity picked up in May with companies continuing to struggle to meet increasing levels of demand. Services activity also shot higher, reaching a record high in May as the economy moves towards fully reopening. The dollar boost also came on Thursday after data from processing firm ADP showed private jobs increased by 978,000, well above expectations of 680,000. Here is where the positive surprises which boosted the dollar ended.
The game changing figure was 559,000.
This is the official number of jobs added to the US economy in May according to the Commerce Department. It came below economists’ forecasts of 675,000, and well below the one million figure some were hoping for. As a result, the dollar index fell from a high of 90.63 to 90.03, wiping out most of Thursday’s gains. Average hourly wages, despite increasing 0.5% in May compared to April, and well above the 0.2% median estimates, failed to support the greenback. The increase in wage should be translated into persistently higher inflationary pressures, but given it occurred mostly in the low-paying jobs segments, it does not seem a big threat.
The best way to interpret last week’s data, is that we are in recovery mode, but its little slower than hoped for in the labor market.
From a monetary policy perspective, the chances of pulling back stimulus sooner than expected are diminishing, and hence the dollar is finding difficulties to build a bullish case. From equity markets perspective, investors are more inclined to take risk, especially in the underperforming growth sector.
As long as data continues to show a path towards full recovery, but not too hot to drag the Fed into tightening monetary policy sooner rather than later, that will be the best environment for risk taking. The dollar may continue to be dragged lower until there’s further evidence of persistent inflationary pressures, which makes Thursday’s US consumer prices the most important data for investors and traders.
Market participants are anticipating a year-over-year increase in consumer prices in the range of 4.2% - 4.7%. If the actual figure comes near the higher side of expectations, we may see some risk taken of the table. A figure near or above 5% will likely lead to steep selloffs in equities, especially if core-CPI comes well above forecast of 3.4%. This will also give another opportunity for dollar bulls to build their case.