This substantial beat in the US labor market report drastically shifted market expectations. Economists predicted only 56K new jobs for August. The Bureau of Labor Statistics reported that the economy created nearly three times that amount. Furthermore, July’s data saw an upward revision from -23K to 21K. The unemployment rate fell to 4.1%, well below central bank officials’ 4.5% year-end target. An unemployment rate of 4.1% not only beats the Federal Reserve’s projection but also signals that businesses remain actively hiring despite elevated borrowing costs. This dynamic complicates the central bank’s dual mandate of maximum employment and stable prices.
Federal Reserve Rate Hike Odds Jump
Swap markets now price a 63% probability of a 25-basis point increase at the September 16 meeting. This marks a sharp jump from 54% just a day prior, according to Prime Terminal data. The strong labor market data forced traders to reprice tightening risks aggressively. A tighter labor market often leads to wage pressures, which can feed into consumer inflation. Consequently, Federal Reserve rate hike bets surged as investors anticipate the central bank will need to cool demand.
The shift from 54% to 63% probability in a single day underscores the market’s sensitivity to employment data. Before this report, many market participants had begun pricing in a pause, assuming that previous rate hikes were sufficiently restrictive. The August jobs surge effectively invalidated that assumption, forcing a rapid repricing of short-term rate expectations.
US Treasury yields initially followed the Dollar Index higher immediately after the data release. The DXY jumped to a daily high of 99.39 before trimming some gains. However, the bond market move faded as the session progressed. This suggests that while the jobs data was strong, some investors remain skeptical about a prolonged tightening cycle given other cooling economic indicators.
Dollar Index Technical Outlook
Despite the fundamental strength from the jobs report, the technical picture for the Dollar Index remains cautious. The DXY currently trades around 99.09 on the daily chart. The near-term tone is bearish as price action holds below the clustered 50-, 100-, and 200-day simple moving averages around 100.22. It also remains beneath the previously supportive primary uptrend line, now referenced near 100.15. A descending trend line from 101.80 keeps the broader recovery attempt capped around 101.26.
The Relative Strength Index (14) sits at about 42, below the midline. This hints at lingering downside pressure rather than an imminent bullish reversal. On the topside, initial resistance is seen at the broken trend-line region around 100.15. This is followed closely by the dense simple moving average cluster near 100.22. The downtrend reference level at 101.26 acts as a more distant cap if a bounce extends.
On the downside, the first notable support is the secondary rising trend line projecting near 98.72. A failure at this level would expose lower levels in the broader range. It would also reinforce the prevailing bearish bias for the currency index. Currency markets often experience a divergence between fundamental shocks and technical reality. While the Nonfarm Payrolls report provided a fundamental catalyst, the broader trend has been downward. Traders will watch to see if the fundamental shift is strong enough to break established technical resistance.
What Happens Next
With the US labor market data in the rearview mirror, traders are now set for next week’s inflation reports. The focus shifts first to the producer price index and then to the consumer price index. If both reports show the disinflation process is not evolving, this could warrant a Federal Reserve rate hike at the next meeting.
On Thursday, Fed Governor Christopher Waller stated that the central bank is in no rush to raise rates if inflation cools down. His comments provided a counterbalance to the hawkish jobs data. However, a bad inflation print next week could keep the next Federal Open Market Committee meeting open to a hike. Investors will scrutinize these inflation metrics to confirm whether the labor market strength is translating into broader price pressures.
Moreover, global market dynamics will play a role. If other major central banks signal a more dovish stance, the Dollar Index could find additional support regardless of domestic inflation data. The interplay between domestic US labor market strength and global monetary policy divergence remains a critical factor for currency traders to monitor.
— Hiro Tanaka, markets desk, AXO News