US dollar abandons first gains after disappointing jobs report

The US dollar drops some of its initial gains over the currency trading action after the Labor Department revealed a disappointing employment report covering the month of May, with employment figures falling below economists’ estimates for the month.

Until today, the value of the greenback – as tracked by the Bloomberg dollar index – accumulates a weekly gain of 0.25% against a basket of currencies, with the benchmark apparently having reached low to 89.535 on May 25 as it has risen 0.7% since then.

A sustained rise in US Treasury yields this week has supported this latest rise in the greenback, with 10-year yields rising 5 basis points to 1.634% so far in this morning’s session. bond trading because the weakness of the job market could delay the Federal Reserve’s decision to reduce its asset purchases.

According to Labor Department data, the US economy created 559,000 jobs during the month of May as economists polled by Dow Jones expected a total of 667,000 new positions during the period.

Earlier this week, the Federal Reserve’s Beige Book revealed that the governors of most central bank branches reported a sustained rise in prices while business leaders in their respective jurisdictions indicated that they expected to increase the price of their goods and services in the near future.

Meanwhile, strong economic data, including a higher than expected reading of the US IHS Markit Manufacturing Purchasing Managers (PMI) index and lower jobless claims compared to market estimates, may have provided some support for the dollar’s rise, even as inflation concerns continue to cap the greenback’s advance.

Michael Hewson from CMC UK Markets anticipated a decline in the greenback if the jobs report did not meet expectations as it did. In a note to clients sent yesterday, the analyst wrote: “Yesterday’s rally in the US dollar suggests an expectation of a strong beating in the overall figure, as well as a big upward revision to the April figure.” .

However, he added: “Anything less than a big beating on both could see the US dollar retreat.”

The Australian dollar and British pound topped the scoreboard against the North American currency this morning as they rose 0.5% each, followed by the Japanese yen and Swiss franc, which jumped 0, 4% after the announcement. In particular, the euro is lagging behind its peers as it only gained 0.2% against the US dollar this morning.

Some analysts have pointed to the bumpy nature of the recovery as a difficult situation when it comes to forecasting where the dollar could land in the coming months, as the COVID-19 situation continues to weigh on the pace at which the economy. global recovery.

In this regard, Matt Weller of Index of cities said in a note to clients: “The month-to-month fluctuations in this report are notoriously difficult to predict, so we wouldn’t put too much emphasis on forecasting.”

What’s next for the US dollar?

10 Year US Treasury Yield Chart – 1 Day Candles with Multiple Indicators – Source: TradingView

At this point, there are two catalysts that should drive the direction of the dollar in the coming months. The first concerns economic data, as evidence that the U.S. economy is recovering strongly from the fallout from the pandemic is expected to lead to a possible decrease in the Fed’s multibillion asset purchases – a scenario that is expected to reduce inflationary pressures, increase yields and stimulate demand for the greenback.

The second catalyst is negative and it is associated with a weaker economic outlook, as this could delay the Fed’s decision to reduce and, as a result, inflation could rise. In this scenario, the purchasing power of the dollar will suffer and this should depress the value of the currency relative to its peers.

Rather than focusing on the technical picture of the US dollar, I prefer to look at US Treasury yields for some indication of where the greenback could go. The chart above shows that yields have paused after the strong recovery that has taken place since the start of the year, when the United States began to scale up its vaccination program.

This pause resulted in the formation of a bullish flag – a continuation pattern that could signal an upcoming resumption of the latest uptrend.

If that happens, we could see the 10-year yield climb to pre-pandemic levels very soon, perhaps after the United States fully recovers from the fallout caused by the health crisis. For now, the outlook for the dollar remains bullish as long as the economy continues to rebound.