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Forex Market Analysis: US Dollar Weakens as Treasury Yields Decline

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CURRENCIES

US Dollar Decline:

• US Treasury yields remain in a downtrend, weakening the dollar.
• US 2-year yields are nearing a two-month low.
• The dollar index trades below key levels: 200-day SMA, 38.2% Fibonacci retracement, and recent trend support.
• Friday’s US Jobs Report may temporarily boost the greenback, but medium-term, the index might fall to 103.44 (50% Fib retracement) before testing 102.34.

Gold Recovery:

• Gold continues to recoup recent losses.
• Currently re-testing the $2,360/oz. level; a break above could signal further gains.
• The recent range of $2,280/oz. – $2,450/oz. is expected to hold in the short- to medium-term.

STOCK MARKET

May Jobs Report:

• Nonfarm payrolls expected to rise by 185,000 in May, compared to 175,000 in April.
• Unemployment rate projected to remain flat at 3.9%.
• Average hourly earnings (month-over-month) anticipated to increase by 0.3%, up from 0.2%.
• Average hourly earnings (year-over-year) expected to stay at 3.9%.
• Average weekly hours worked likely to remain at 34.3.

Market Reaction:

• Stock market has hit record highs amid softer-than-expected economic data.
• Increased investor confidence that the Federal Reserve might cut interest rates in September.
• Markets pricing in a 67% chance of a rate cut in September, up from 50% a week ago (CME FedWatch Tool).

Labor Market Trends:

• Economists see the report indicating a healthy, balanced labor market rather than a broader economic slowdown.
• Bank of America economist Michael Gapen suggests the “catch-up” effect in hiring is fading, supporting potential for Fed policy easing based on inflation confidence.

Additional Data:

• The latest JOLTS report showed job openings fell to their lowest level since February 2021.
• Ratio of job openings to unemployed people returned to 1.2, aligning with pre-pandemic levels.

Wage Growth:

• April’s year-over-year wage growth fell below 4% for the first time in nearly three years.
• Economists expect May’s wage growth to rise slightly on a monthly basis to 0.3%.
• Year-over-year wage growth expected to remain at 3.9%.

Key Considerations:

• Friday’s report will be scrutinized for signs of either a labor market normalization or an early economic slowdown.
• Consistently high wage growth could contribute to persistent inflation.
• Oxford Economics chief US economist Ryan Sweet notes the Fed aims for a gradual slowing in job and wage growth trends.

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