US Unemployment Rate Drops, US Dollar Strengthens

The fall in the US unemployment rate for March 2022 was solid, although the Non-farm Payroll data missed expectations.

The US dollar index posted an increase of around 0.3 percent above 98.60 after the release of US employment data in the New York session today (1/April). The greenback has strengthened in most of the major currency pairs thanks to a solid decline in the US unemployment rate, although the Non-farm Payroll data missed expectations.

DXY Daily chart via TradingView

US Economic Momentum Remains Solid

Non-farm payroll (NFP) data shows an increase of 431,000 in March 2022, or lower than the consensus estimate of 490,000. This figure is also lower than February's NFP data which was revised up from 678,000 to 750,000. Nevertheless, the US unemployment rate slumped from 3.8% to 3.6% -the lowest level since February 2020-.

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The data point to the US economic momentum remaining solid amidst soaring inflation, the Fed's interest rate increases, global supply disruptions, and the Russia-Ukraine war. As a result, expectations of the Fed's rate hike next month remain solid.

"Another strong data that maintains expectations for two or more jumbo-sized Fed hikes in the coming months, and has added to the momentum pushing the US dollar higher," commented Karl Schamotta, chief market strategist at Corpay, about the report.

The Fed has raised interest rates by 25 basis points this month. Fed Chair Jerome Powell's last statement hinted at the potential for another 50 basis point rate hike at the next FOMC meeting on May 3-4, 2022. The CME FedWatch Tool indicates a 68.8% chance of such an increase.

Meanwhile, the US dollar also tends to benefit from the resurgence of risk-off sentiment due to the lack of progress in the Russia-Ukraine negotiations. Although both sides claim to have made progress at last week's talks, this week's discussions are starting to get tense again.

Russia Demands Payment In Rubles

Russian President Vladimir Putin is demanding that European countries pay for purchases of Russian gas in rubles starting Friday. Putin's decree risks depriving Europe of more than a third of its gas supplies, so a number of countries have begun to devise contingency plans for gas rationing - including Germany -. This supported the ruble exchange rate, but triggered another slide in the euro and other European currencies versus the US dollar.

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Putin said that the use of the ruble would strengthen Russian sovereignty. According to him, it makes no sense for Russia to accept payments in euros and US dollars when Russian assets in those two currencies have been frozen by the West. He accused Europe of getting Russian gas supplies for free because of the sanctions freeze on these assets, and that this should not continue.

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The United States has offered LNG supplies to Europe, but not enough to replace Russian supplies. European gas prices soared up to 4% after Putin's announcement, thereby increasing the risk of a recession on the Blue Continent. Various companies that rely on this fuel are forced to limit production activities, while the governments of each country are discussing the next steps to be taken.