DXY: US economic exceptionalism narrative facing major test
US economic exceptionalism has been hard to question in recent years, surprising to the upside relative not only to expectations but other developed nations. But that narrative now faces a major test. Data is undershooting more often than not, suggesting activity is not only slowing but potentially rolling over rapidly.
With US inflation data indicating the disinflationary trend late last year may have returned, it feels like we’re only one bad US unemployment print away from the Fed signaling the start of the next rate cut cycle. That makes Friday’s June nonfarm payrolls report arguably more important than usual, not only when it comes to the expected timing of rate cuts but how many we may see this cycle.
That matters for the US dollar which has been sucking capital from the rest of the world in recent years, enticing investors with by higher yields and stronger growth prospects. Take that away and it’s difficult to see the dollar remaining this strong without unexpected financial turmoil.
Downside risks are also evident on the US dollar index weekly chart.
Bullish DXY breaks have constantly failed at downtrend resistance over the past 12 months. And when you look at the last three candles, it looks like a possible evening star formation, a pattern often seen around market tops. But it’s not complete yet. We need to see how it ends the week, emphasising why the payrolls report is important.
For the Fed, the payrolls figure doesn’t provide any meaningful signal on labour market tightness which feeds into wages expectations and inflationary pressures. Yet, you can’t escape that markets tend to react initially on the payrolls number relative to expectations.
The signal that matters to the Fed, and therefore the US rate outlook, is found in the average hourly earnings and unemployment figures. Should they soften noticeably like so many other US economic indicators recently, yields on short-end US rates could unwind sharply, sending DXY potentially back to support at 104 or lower.
With US inflation data indicating the disinflationary trend late last year may have returned, it feels like we’re only one bad US unemployment print away from the Fed signaling the start of the next rate cut cycle. That makes Friday’s June nonfarm payrolls report arguably more important than usual, not only when it comes to the expected timing of rate cuts but how many we may see this cycle.
That matters for the US dollar which has been sucking capital from the rest of the world in recent years, enticing investors with by higher yields and stronger growth prospects. Take that away and it’s difficult to see the dollar remaining this strong without unexpected financial turmoil.
Downside risks are also evident on the US dollar index weekly chart.
Bullish DXY breaks have constantly failed at downtrend resistance over the past 12 months. And when you look at the last three candles, it looks like a possible evening star formation, a pattern often seen around market tops. But it’s not complete yet. We need to see how it ends the week, emphasising why the payrolls report is important.
For the Fed, the payrolls figure doesn’t provide any meaningful signal on labour market tightness which feeds into wages expectations and inflationary pressures. Yet, you can’t escape that markets tend to react initially on the payrolls number relative to expectations.
The signal that matters to the Fed, and therefore the US rate outlook, is found in the average hourly earnings and unemployment figures. Should they soften noticeably like so many other US economic indicators recently, yields on short-end US rates could unwind sharply, sending DXY potentially back to support at 104 or lower.
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