Dollar weakens further ahead of the NFPs

2023.06.02 05:42

• Dollar extends slide on slowing unit labor costs
• Investors scale back their Fed hike bets
• NFPs enter the limelight; mind the earnings
• Wall Street cheers June pause prospect

Dollar slips as investors remove more June hike bets

The US dollar continued tumbling on Thursday, losing ground against every other major currency, while staying on the back foot against most of its peers today as well.

Following dovish remarks by Fed Board Governor Jefferson and Philadelphia Fed President Harker, who both expressed a preference to “skip” a June rate hike, economic data came to cast more doubts on whether raising rates at the upcoming Fed meeting is the optimal choice.

The ADP report revealed that the private sector gained a lot more jobs than anticipated during May, but it seems that investors paid more attention to a Labor Department report, just fifteen minutes later, which revealed that the price of labor per single unit of output accelerated only to 4.2% qoq from 3.2% during the first three months of the year, marking a sizable downside revision from the 6.3% growth rate indicated by the preliminary release on May 4.

So, combined with a slide in the ISM manufacturing PMI, which indicated contraction for the seventh straight month, this wage inflation metric prompted investors to add to their bets of a Fed pause in June. Even a July hike has now become doubtful. Specifically, there is a 70% probability of a June pause, while there are only 18bps worth of a hike priced in for July.

Nonfarm payrolls on tap, focus could fall on wage growth

Today, traders will have to evaluate the official US employment report for May, with nonfarm payrolls expected to have slowed to 180k from 253k and the unemployment rate to tick up to 3.5% from 3.4%, its lowest in more than fifty years. Considering yesterday’s ADP result, the risks for the nonfarm payrolls number may be tilted to the upside.

However, judging by the dollar’s response to the Unit Labor Costs data yesterday, it appears that market participants could pay more attention to the wage growth numbers. Average hourly earnings are anticipated to have slowed to 4.3% year-over-year from 4.4%, but with the ADP revealing a pay slowdown, with a full percentage point decline in pay growth for job changers, and the price subindex of the ISM manufacturing PMI dropping by 9 points, a lower-than-expected earnings growth rate today cannot be ruled out.

Cooling wages could keep any NFP-related gains in the dollar limited, and actually allow more selling later in the day, which would add credence to the view that it is too early to label the latest rebound in the US dollar as a bullish reversal. For that to start being examined, euro/dollar may have to break below the key support zone of 1.0510. However, with ECB President Lagarde insisting that more tightening is necessary in the Eurozone despite inflation slowing by more than expected last month, such a dip in euro/dollar appears to be a hard task for now.

Wall Street extends rally on Fed pause hopes

With the probability of the Fed pausing in June increasing and a July hike becoming less likely, market participants decided to add to their risk exposure yesterday by buying more stocks. All three of Wall Street’s main indices closed in the green yesterday, with the tech-heavy Nasdaq leading the way. This suggests that apart from the increasing Fed pause hopes, some investors are still riding the artificial intelligence (AI) bandwagon.

Some may still be cheering the debt ceiling deal, with the bill passing through the Senate during the Asian session today. However, the deal acts as a boost pill now as it eliminates the risk of a destabilizing economy, but a potential liquidity squeeze from Treasury issuance could have the opposite effect. With Nasdaq now nearly 40% up from its October low, the risk of a downside correction in the foreseeable future may be increasing.

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