This Week: Jobs report to test dollar strength

Although the US dollar index is now easing away from overbought conditions, it’s still trading around a two-month high.

The US dollar’s rebound in May has indeed been strong with three solid weeks of gains, with this index closing in on levels last seen before the US banking blow-up.

However, whether or not the USD can continue pushing higher may all come down to the incoming US nonfarm payrolls report due Friday.

 

This week also features these potential market-moving events:

Monday, May 29

• UK and US markets closed

 

Tuesday, May 30

• JPY: Japan April unemployment
• EUR: Eurozone May economic confidence
• USD: US May consumer confidence; speech by Richmond Fed President Thomas Barkin

 

Wednesday, May 31

• JPY: Japan April retail sales, industrial production
• CNH: China May PMIs
• EUR: Germany May CPI, unemployment
• CAD: Canada March/Q1 GDP
• USD: Fed Beige Book; speeches by Philadelphia Fed President Patrick Harker, Boston Fed President Susan Collins, Fed Governor Michelle Bowman

 

Thursday, June 1

• CNH: China May Caixin manufacturing PMI
• EUR: Eurozone May CPI; April unemployment; speech by ECB President Christine Lagarde
• Crude: US crude oil inventories report
• USD: US weekly initial jobless claims; May ISM manufacturing; speech by Philadelphia Fed President Patrick Harker

 

Friday, June 2

• USD: US May nonfarm payrolls

 

 

Dollar bulls have benefitted as bets on Fed rate cuts have been reined in sharply.

By year-end, the Fed’s benchmark rates are now expected to remain around the 5% mark, nowhere near the 4.25% level that had been discounted immediately following the early-May FOMC meeting.

Markets also see that there is now more of a chance of 25bp rate hike at the June FOMC meeting, than the Fed pausing.

This huge shift in rate expectations, brought on by elevated inflation, a pending debt ceiling deal and a still-solid economy will be tested by the marquee US employment report released on Friday.

The greenback’s stellar month is becoming slightly overbought, and attention will be focused on the wage growth numbers after their sharp jump last time.

 

Here are the median forecasts by economists for this Friday’s US jobs report:

• 190,000 new jobs added in May (second-lowest tally since pre-pandemic times)
   
• 3.5% unemployment rate (slightly higher than April’s 3.4%)
   
• 0.3% average hourly earnings month-on-month growth (slower than April’s 0.5% m/m gain)

 

Ultimately, markets want to know …

Is this the start of a sticky trend or will this widely-watched jobs data pull back?

Further signs of moderation in the US labour market may allow the Fed to press pause with its rate hikes, with such a narrative potentially lending itself to a softer US dollar.

However, if the US jobs market stays resilient, that could invoke more demand-destroying rate hikes by the Fed, which in turn could restore the US dollar to its year-to-date high closer to the 106 level.