US Dollar on edge as focus shifts to May jobs report

• US Dollar struggles to stage a rebound following Thursday's selloff.
• US Dollar Index stays below 104.00 and looks to snap a three-week winning streak.
• US May jobs data could impact US Dollar's valuation ahead of the weekend.

The US Dollar (USD) is having a hard time staying resilient against its rivals on the last trading day of the week. The US Dollar Index, which tracks the USD's valuation against a basket of six major currencies, stays in negative territory below 104.00 after having lost more than 0.5% on Thursday.

May jobs report from the United States (US) will be watched closely by market participants due to its potential impact on the market pricing of the US Federal Reserve's (Fed) next policy decision. 

Daily digest market movers: US Dollar continues to lose value against its peers

• Nonfarm Payrolls (NFP) in the US are expected to rise 190,000 in May. The Unemployment Rate is forecast to rise slightly to 3.5% from 3.4%.
• The economic activity in the US manufacturing sector continued to contract at an accelerating pace in May with the ISM Manufacturing PMI dropping to 46.9 from 47.1 in April. This reading came in worse than the market expectation of 47. More importantly, the inflation component of the PMI survey, Prices Paid Index, fell sharply to 44.2 from 53.2, compared to analysts' estimate of 52.
• The data published by Automatic Data Processing (ADP) showed on Thursday that private sector employment in the US rose by 278,000 in May. This reading surpassed the market expectation of 170,000 by a wide margin. Underlying details of the publication revealed that the annual wage inflation for 'job stayers' declined to 6.5% from 6.7% in April.
• The US Bureau of Labor Statistics revised the change in Unit Labor Costs for the first quarter lower to 4.2% from 6.3% in the advanced estimate.
• Other data from the US revealed that there were 232,000 initial claims for unemployment benefits in the week ending May 27, compared to 230,000 in the previous week.
• Philadelphia Fed President Patrick Harker noted on Wednesday and Thursday that he was leaning toward a pause in rate hikes in June but noted that incoming data may change his mind.
• Federal Reserve Governor Philip Jefferson said that pausing rate hikes at the next FOMC meeting would offer time to analyse more data before making a decision about the extent of additional tightening. 
• According to the CME Group FedWatch Tool, the probability of one more 25 basis points (bps) Fed rate hike at the upcoming meeting declined below 30% from nearly 70% earlier in the week.
• The House of Representatives passed a bill to suspend the debt limit through January 1, 2025. US stock index futures trade modestly higher on Thursday.
• The US Bureau of Labor Statistics reported on Wednesday that the number of job openings on the last business day of April stood at 10.1 million, compared to 9.74 million in March. This reading came in higher than the market expectation of 9.37 million and provided a short-lasting boost to the USD.
• In an interview with the Financial Times, Cleveland Federal Reserve (Fed) Bank President Loretta Mester said that she doesn't necessarily see a compelling reason for pausing rate increases amid a "really embedded, stubborn inflationary pressure.”
• Consumer sentiment in the US weakened slightly in May with the Conference Board's (CB) Consumer Confidence Index edging lower to 102.3 from 103.7 in April (revised from 101.3). The Present Situation Index declined to 148.6 from 151.8 and the Consumer Expectations Index stayed virtually unchanged at 71.5. Finally, the one-year consumer inflation expectations ticked down to 6.1% in May from 6.2% in April.

Technical analysis: US Dollar Index stays below key technical level

The US Dollar Index (DXY) broke below 104.00 on Thursday, where the Fibonacci 23.6% retracement of the November-February downtrend is located. On the downside, 103.00 (100-day SMA) aligns as critical support. A weekly close below that level could bring in additional sellers and open the door for an extended decline toward 102.40 (50-day SMA) and 102.00 (psychological level). where the 100-day Simple Moving Average (SMA) and the 20-day SMA meet.

On the flip side, DXY could gather bullish momentum and rise toward 104.50 (static level) and 105.00 (psychological level) if it manages to rise above 104.00 and use that level as support.

How does Fed’s policy impact US Dollar?

The US Federal Reserve (Fed) has two mandates: maximum employment and price stability. The Fed uses interest rates as the primary tool to reach its goals but has to find the right balance. If the Fed is concerned about inflation, it tightens its policy by raising the interest rate to increase the cost of borrowing and encourage saving. In that scenario, the US Dollar (USD) is likely to gain value due to decreasing money supply. On the other hand, the Fed could decide to loosen its policy via rate cuts if it’s concerned about a rising unemployment rate due to a slowdown in economic activity. Lower interest rates are likely to lead to a growth in investment and allow companies to hire more people. In that case, the USD is expected to lose value.

The Fed also uses quantitative tightening (QT) or quantitative easing (QE) to adjust the size of its balance sheet and steer the economy in the desired direction. QE refers to the Fed buying assets, such as government bonds, in the open market to spur growth and QT is exactly the opposite. QE is widely seen as a USD-negative central bank policy action and vice versa.