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US Dollar falls with ADP missing the mark for the August release and downward revision for July

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3 months ago

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US Dollar falls with ADP missing the mark for the August release and downward revision for July

  • The US Dollar trades lower with ADP coming in softer. 
  • ADP data for July revised lower as well
  • The US Dollar Index retreats and flirts with a break below 101.00.

The US Dollar (USD) trades softer on Thursday, with a lot of data points set to be released in a condensed time span. The Greenback already eased on the back of the JOLTS Job Openings report on Wednesday, when the previous number was revised and the recent print for July came in below the estimation. It was enough for markets to price in more rate cuts by the Federal Reserve (Fed) and devalue the US Dollar on the back of narrowing the interest rate gap between the US and other countries. 

On the economic data front, it will be up to experienced traders to navigate the set of data that will be released on Thursday to markets. The monthly ADP Employment Change for the private payrolls release already came in softer than expected, while the previous number got revised down as well. Next up the weekly Initial/Continuing Jobless Claims, which will move the US Dollar. The Purchasing Managers Index (PMI) Services data from the Institute for Supply Management (ISM) is also of note. 

Daily digest market movers: ADP misses big time

  • At 11:30 GMT, the Challenger Job Cuts for August jumped up 193% from 25,885 to 75,891.
  • At 12:15 GMT, the ADP Employment Change for August contracted from 122,000 to only 99,000. That is below the estimated elevated number at 145,000. To make matters even worse, the July number got revised lower from 122,000 to 111,000.
  • At 12:30 GMT, the weekly Jobless Claims data are due to be released.
    • Initial Claims are expected to stay steady at 230,000 in the week of August 30, coming from 231,000 the previous week.
    • Continuing Claims are set to head to 1.87 million in the week of August 23 from 1.868 million. 
    • In the slipstream of the weekly Jobless Claims, the monthly Nonfarm Productivity and Unit Labor Costs for the second quarter will be released. For the Nonfarm Productivity, a steady 2.3% increase is expected, while the Unit Labor Costs should remain at 0.9%.
  • At 13:45 GMT, S&P Global will deliver its final reading for the Services and Composite PMI numbers for August. Services are expected to remain stable at 55.2, and the composite is expected to remain at the previous reading of 54.1. 
  • The Institute for Supply Management (ISM) will close this Thursday’s data batch at 14:00 GMT with its August reading for the Services sector:
    • The PMI headline number is expected to come in at 51.1, downfrom 51.4 in July.
    • The Employment Index was at 51.1 the previous month, with no forecast available.
    • The New Orders Index was at 52.4 in July, with no forecast available.
    • The Prices Paid Index was at 57, with no estimation pencilled in. 
  • Equities are starting to react positive on the weaker US data. US equities are erasing earlier losses and turn flat after the ADP miss print. 
  • The CME Fedwatch Tool shows a 55.0% chance of a 25 basis points (bps) interest rate cut by the Fed in September against a 45.0% chance for a 50 bps cut.  Another 25 bps cut (if September is a 25 bps cut) is expected in November by 30.2%, while there is a 49.5% chance that rates will be 75 bps (25 bps + 50 bps) below the current levels and a 20.3% probability of rates being 100 (25 bps + 75 bps) basis points lower. 
  • The US 10-year benchmark rate trades at 3.73%, the lowest level this week and retreats further, narrowing the rate gap with other currencies.

US Dollar Index Technical Analysis: Again missing the mark

The US Dollar Index (DXY) looks to be stuck in a tight range, remaining there for now after Tuesday’s data was unable to move the needle. With the JOLTS Job Openings report on Wednesday, the assumption is the same: any number that comes in substantially above or below consensus will move the DXY in either direction. Meanwhile, markets are giving a bigger chance to a 50 basis point rate cut by the Fed this month. 

The first resistance at 101.90 is starting to look very difficult to break through after it already triggered a rejection earlier this week. Further up, a steep 2% uprising would be needed to get the index to 103.18.  Finally, a heavy resistance level near 104.00 not only holds a pivotal technical value, but it also bears the 200-day Simple Moving Average (SMA) as the second heavyweight to cap price action.

On the downside, 100.62 (the low from December 28) could soon see a test in case data supports more rate cuts from the US Federal Reserve (Fed).  Should it break, the low from July 14, 2023, at 99.58, will be the ultimate level to look out for. Once that level gives way, early levels from 2023 are coming in near 97.73.

US Dollar Index: Daily Chart

Employment FAQs

Labor market conditions are a key element in assessing the health of an economy and thus a key driver for currency valuation. High employment, or low unemployment, has positive implications for consumer spending and economic growth, boosting the value of the local currency. Moreover, a very tight labor market – a situation in which there is a shortage of workers to fill open positions – can also have implications on inflation levels because low labor supply and high demand leads to higher wages.

The pace at which salaries are growing in an economy is key for policymakers. High wage growth means that households have more money to spend, usually leading to price increases in consumer goods. In contrast to more volatile sources of inflation such as energy prices, wage growth is seen as a key component of underlying and persisting inflation as salary increases are unlikely to be undone. Central banks around the world pay close attention to wage growth data when deciding on monetary policy.

The weight that each central bank assigns to labor market conditions depends on its objectives. Some central banks explicitly have mandates related to the labor market beyond controlling inflation levels. The US Federal Reserve (Fed), for example, has the dual mandate of promoting maximum employment and stable prices. Meanwhile, the European Central Bank’s (ECB) sole mandate is to keep inflation under control. Still, and despite whatever mandates they have, labor market conditions are an important factor for policymakers given their significance as a gauge of the health of the economy and their direct relationship to inflation.

 

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