US dollar index (DXY) plunges as BLS downgrades employment growth and looms interest rate cuts

• US dollar index plunges on revised employment data and dovish Fed minutes
• BLS revises US job growth downwards. Biggest downward revision since the global financial crisis.
• Fed rate cuts priced in? Powell's Jackson Hole speech in focus.

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The US dollar is treading water and heading for a four-day losing streak. A brief upswing earlier in the day was overshadowed by a sharp downward revision in wage data from the US Bureau of Labor Statistics.

The Bureau of Labor Statistics (BLS) recently revised its data, showing that 818,000 fewer jobs were created in the U.S. in the year ending March 2024 than originally estimated. This suggests that the labor market is cooling faster than expected, with about 68,000 fewer jobs being created each month.

Historical payroll audits

Source: BLS, Refinitiv

In early August, the BLS reported 114,000 new jobs in July 2024, which is lower than the revised 179,000 in June and the forecast of 175,000. This is the sharpest downgrade since the global financial crisis and suggests that the labor market is much weaker than originally expected. This is no surprise, as there are some analysts who have been touting this for months, but since they are in the minority, their views have been largely overlooked by market participants.

The only upside is that investors were already expecting sharp rate cuts. Given the recent decline in the US dollar, investors seem to have already priced in many of the expected cuts.

This was further reinforced by the minimal reaction to the release of the Fed minutes. The minutes showed that Fed policymakers agreed that July might be appropriate for a rate cut, but decided to wait until September. This undoubtedly further cements the rate cut discussion ahead of the September meeting.

Federal Reserve Chairman Jerome Powell is scheduled to speak at the Jackson Hole Symposium on Friday. Market participants were expecting volatility and perhaps some clarity on September rate cuts. However, today's data means the Fed has no choice but to start cutting rates in September, and the question is: what impact will Powell's speech have on markets given yesterday's developments?

However, later in the day we also have preliminary S&P PMI data that could provide further insight into the US economy. Expect some volatility, but unless we deviate significantly from consensus, I don't expect the data to have a major impact on rate cut expectations.

Source: All market-moving economic news and events can be found in the MarketPulse economic calendar. (click to enlarge)

Technical analysis of the US dollar index (DXY)

The US dollar index (DXY) is under strong selling pressure, but today's daily candle shows indecision with almost equal wicks on both sides, suggesting a possible reversal midweek.

The DXY is near the crucial 100.00 level, last breached in July 2023, and a breakout could trigger a faster sell-off.

I am concerned about how much of the Fed's upcoming rate cuts has already been priced in.

On the upside, immediate resistance lies at 102.160, the August 5 swing low, before 102.64 becomes significant.

US Dollar Index Daily Chat, August 22, 2024

Source: TradingView.com

Support

Resistance

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Zain is an experienced financial market analyst and lecturer with a wealth of experience in the world of forex trading, economics and market analysis. He began his career in sales and business development, but his passion for economics and technical analysis drove him to a career as an analyst.

He has spent the last three years as an analyst honing his skills in various areas of finance including technical analysis, economic data interpretation, price action strategies, and analyzing geopolitical impact on global markets. Zain is currently working on his Capital Markets & Security Analyst (CMSA) certification with the Corporate Finance Institute (CFI), where he has completed modules in Fixed Income Fundamentals, Portfolio Management Fundamentals, Equity Market Fundamentals, Introduction to Capital Markets, and Derivatives Fundamentals.

He is also a regular guest on radio and television shows in South Africa, providing insights into global markets and the economy. He has also helped develop a financial markets course recognised by BankSeta (Banking Sector Education and Training Authority) at NQF Level 6 in South Africa.