US nonfarm payrolls preview: implications for the US dollar index (DXY)

The US dollar index (DXY) is on track for the first weekly losses of the year as traders reflect on the Fed decision and the upcoming Nonfarm Payrolls (NFP) data. It retreated to a low of $103.02 on Friday, a few points below this week’s high of $103.7.

NFP data ahead

The US dollar index was in the spotlight this week after the Federal Reserve delivered its first interest rate decision of the year. In it, the bank left rates unchanged, a move that surprised no one. However, Jerome Powell ruled out against cutting rates in its March meeting as some analysts were expecting.

He also committed to maintain his data-dependence approach when considering when to start cutting rates. One of the data that the Fed will focus on will come out on Friday when the Bureau of Labor Statistics (BLS) will publish the latest jobs numbers.

The jobs report is an important one because it is part of the Fed’s dual-mandate role of price stability and ensuring low unemployment rate. Economists believe that the economy continued doing well in terms of the labor market.

In this case, they believe that the unemployment rate remained at 3.7% in January as the economy added over 180k jobs. The US has added millions of jobs in the past few years. Recently, however, many big companies like Alphabet, Citigroup, and PayPal have announced layoffs. 

Economists also expect the data to show that the labor participation rate and wages continued rising in January.

The report will come a day after the US published strong manufacturing numbers. The ISM manufacturing PMI jumped to 50.7 in January, higher than the median estimate of 50.3. A PMI figure of 50 and above is a sign that a sector is growing.

Therefore, if the US reports a strong jobs report, it means that the Fed will have no reason to start cutting rates in March.

US dollar index weekly chart

US dollar index and other central bank decisions

The US dollar index has also reacted to the central bank decisions of key countries. On Thursday, the Bank of England (BoE) left interest rates unchanged at 5.25% and hinted that its rates were under review. That was interpreted to mean that the bank was considering to start cutting interest rates in the first half of the year in a bid to stimulate growth.

Last week, the European Central Bank (ECB) also maintained its status quo and pointed to cuts happening later this year. With the US economy doing better than other countries, there is a likelihood that they could start cutting rates earlier. 

The key bank to watch will be the Bank of Japan, which could deliver its first interest rate hike since 2007 later this year. All these central banks have an impact on the US dollar index because they make a huge share of the DXY.