Is the US labour market hot enough to lock in a fifty from the Fed?

The US dollar index and the DXY started March in a holding pattern guided sideways by the idea that the Federal Reserve wouldn’t raise interest rates past the levels already priced into markets.

Reasoning that Fed Chair Powell, in his Testimony to Congress overnight, would look through the run of hot economic data and guided by the more dovish centre of the FOMC committee by expressing a preference for a more extended sequence of 25bp rate hikes.

However, that sentiment was soon thrown out when the Fed Chair noted recent economic data has been stronger than expected and that if the “totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.”

The probability of a 50bp rate hike at the March FOMC increased from 31% to 69% while the US two-year yields closed above 5% for the first time since May 2007. Simultaneously, the DXY surged to its highest level in thirteen weeks.

In a nutshell, if Friday’s non-farm payrolls (NFP) and next week’s CPI releases are much hotter than 215k and 0.4% expected, it will push the FOMC towards a 50bp rate hike in March and the DXY index higher again.

What is expected from this week’s US labour market data?

• Tomorrow at 12.15 am AEDT, the ADP employment report for February will be released. ADP isn’t viewed as an exceptionally reliable indicator for NFP however it is expected to rise by 200k vs 106k in January
• The JOLTS Job Openings Report for January is scheduled to be released at 2.00 am AEDT and is viewed as a much better guide to the state of the labour market than the ADP report. Unfortunately, it is always one month behind the NFP report.
  The market expects 10.5 million job openings in January, from 11 million in December
• NFP – the big one will be released on Saturday at 12.30 am AEDT. While weather temperatures cooled in February following a warmer January, little snow fell during the February survey period. This can mean fewer layoffs in retail, leisure, and hospitality.
  
  Additionally, the labour market appears stronger than expected at the start of 2023. All of which suggests there are upside risks to the market’s consensus expectation of +215k.
  
  Turning to the other measures, the unemployment rate is expected to stay at 3.4%, and average hourly earnings are expected to rise to 4.7% from 4.4%.

DXY technical analysis

After peaking in September at 114.78, the US dollar index and the DXY index, fell over 12% as the market anticipated the Fed would slow its rate hiking cycle and as it moved closer to a potential pause.

However, as can be viewed on the chart below, the DXY index commenced a recovery in early February, which coincided with the start of the hotter US economic data.

Not far from the current level, there is a layer of solid resistance coming in between 106.60 (the 200-day MA) and 107.60 (the top of the trend channel from the 114.78 high). In the initial instance, this resistance band is expected to hold before, at the very least, a minor pullback.

However, should the DXY then see a sustained break above 106.60/107.60, it would open up a push initially towards 110.00 with a scope to 112.00.

DYX index daily chart