Market Overview

Non-Farm Payrolls data released last Friday supported the U.S. Dollar. This latest economic news from the United States points to a strong labour sector which is preventing a recession from happening and which is also allowing the Federal Reserve (Fed) to continue interest rate hikes to battle high inflation.

Indeed, the unemployment level in March contracted to 3.5% from 3.6% in February. Hourly wages rose by 0.3% month-on-month compared to 0.2% in the previous month, while Non-Farm Payrolls were at 236,000, lower than 326,000 in February, but far above 145,000 projections by ADP. This could mean that the banking crisis in the United States was quite limited, and has almost no effect on the real sector considering labour market indications. This is very inspiring for the Fed. The 10-year Treasuries yields soared to 3.41% from 3.25% on the news. Investors were separated in the middle as to their predictions that the Fed could stop raising its interest rates at 5%, while just after the publication of the labour market data, only 27% of investors expected the Fed to do so. More than 73% suggest that the rate will be increased to 5.25% in May. Moreover, more than 34% of investors now believe rates could be raised by 5.75% by the end of the year, and some 33% believe rates could be hiked even to 6.00%, while only 29% of investors expected as much last week.

The Fed’s balance was seen to have contracted to $8632 billion on the April 4 from its peak of $8735 billion. This decline has been gaining momentum since March 28, and is likely to accelerate even further. This is also a sign of the fading banking crisis, which has left no negative implications on the real economy. So, the Fed is likely to return to a monetary tightening policy, and so will limit the monetary supply even by keeping interest rates untouched. That will support the Dollar and the demand for Dollar-denominated assets.

These considerations may signal that the U.S. Dollar index (DXY) is unlikely to drop below 100.6 points, the current lows of 2023. This forecast is intact before the Fed can start its U-turn in its monetary tightening policy, or will send out a clear message signalling to this turn. The index may look for an upside correction to 102.8-103.0 points towards March highs.

The Fed also has some more room to lift interest rates up and keep its pace up in line with the European Central Bank (ECB). Thus, the upside potential for the EURUSD may be limited by 1.1230. The next major contest for the Dollar may be expected on April 12 when Consumer Price Index data will be released. With this being said, this data is not expected to be fully consistent, as it will not reflect the impact of March monetary flooding by the Fed and the Ministry of Finance. April inflation data will be much more intriguing in this regard, but it will be released after the Fed will meet on May 5.

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