US Dollar Today: Nonfarm Payrolls, Wage Growth Numbers, "Trade War" in Focus

-USD edges higher amid trade tensions, ahead of jobs report.

-Payrolls seen rising 189k, wages to have increased 0.2% in May.

-High bar for a meaningful USD reaction as Fed is priced to perfection.

© Robert Cicchetti, Adobe Stock

The US Dollar crept higher on Friday as markets remained on edge a amid the latest escalation of fears over a so called trade war and as traders took up positions ahead of May nonfarm payrolls and wages data due for release at 13:30 London time.

Friday's labour market data will be released against a backdrop of elevated tensions over the international trade arrangements, with President Donald Trump having imposed tariffs on aluminium and steel imports from the European Union, Canada and Mexico, drawing threats of retaliation from the targeted parties.

Consensus suggests markets are looking for the US economy to have created 198,000 new jobs during the month of May, up from 164,000 during April. Meanwhile, the unemployment rate is expected to have held steady at 3.9%, its lowest level since the year 2000 and average pay packets are forecast to have grown by 0.2%, making for annual wage growth of 2.6%.

"We forecast a 190,000 gain in non-farm payrolls (13.30 BST) in May, with the unemployment rate holding steady at 3.9%. Meanwhile, we think that average hourly earnings rose by a stronger 0.3% m/m in May, which would lift the annual rate to 2.7%. That would leave the Fed on track to raise rates again in June," says Andrew Hunter, an economist at Capital Economics.

Markets care about the labour market data because falling unemployment and improving job creation, according to conventional thinking on the subject, put upward pressure on wages. Wage growth itself leads to increased demand within an economy and exerts upward pressure on inflation, which has implications for interest rates and financial markets. 

Changes in interest rates, or hints of them being in the cards, are only made in response to movements in inflation but impact currencies because of the push and pull influence they have on international capital flows and their allure for short-term speculators.

"TD looks for an above-consensus 200k print (market: 190k) for May job growth while calendar effects should restrain wages to a 0.2% m/m increase, in line with market expectations, leaving wage growth unchanged at 2.6% y/ y," says Michael Hanson, global head of macro strategy at TD Securities. "We'll keep an eye on the wages measure though an in-line consensus expectation means the jobs report is likely to pass with little fanfare."

The US Dollar index was quoted 0.04% higher at 94.01 during the morning session Friday and the USD/JPY rate was 0.30% higher at 109.12. The Pound-to-Dollar rate was unchanged at 1.3287 and the Euro-to-Dollar rate was 0.02% lower at 1.1690.

Friday's data also comes amid an eight week-long rally that has seen the US Dollar convert convert a 4% 2018 loss into a 1.7% gain. However, after reaching its highest level since late 2017 in May, the Dollar index appears to have stalled around the 94 level and some strategists have observed that momentum behind the greenback is now waning.

"We are of the view, however, that the USD looks a bit overcooked at current levels and so we think that the hurdle is very high - outside of the significant escalation of Italian soap opera antics - to nudge the USD higher from here. This leaves us comfortable in holding our short USDJPY position particularly as so much is baked into the Fed cake right now and the UST yield backdrop still looks like it has more room to run lower," says Hanson.

Driving broader moves in exchange rates over the last eight weeks has been a sudden shift in global bond markets, which saw yields on American bonds of all tenures rise to multi-year highs which, pushing interest rate differentials favouring the Dollar to near record levels.

Multiple factors have been behind this shift, including an inflation-boosting rise in oil prices, superior levels of US economic growth and rising issuance of new bonds at the US Treasury in order to finance President Trump's budget-busting tax cuts.

Those more favourable yield differentials have seen international investors, particularly so called carry traders, incentivised to sell lower yielding currencies and buy the Dollar in order to invest in the US bond market. But increasingly, strategists are calling a top for bond yields and the US currency.

Market hopes of a pickup in the pace at which the Federal Reserve raises interest rates have been an important contributing factor in recent bond and currency market price action. But the minutes of the latest monetary policy meeting, released last week, place a question mark over whether any such pickup will ever be forthcoming.

Wednesday's minutes showed a majority of Federal Open Market Committee members agree another interest rate rise will be appropriate "soon".

But they otherwise appeared to overlook the current level of US inflation, as well as the prospect of US consumer price growth continuing to exceed the Fed's 2% target in the months ahead, leaving the meeting record devoid of the hawkish tones that would have been necessary to ensure continued support for an extended Dollar rally.

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