NFP Data Improves, US Dollar Remains Strong

The NFP data provided an extraordinary surprise, so market players ruled out a number of other disappointing US employment data.

The US Dollar exchange rate strengthened again in the New York trading session on Friday (6/October). Actual Nonfarm Payroll (NFP) data outperformed market estimates, so the greenback recovered its position against various other major currencies.

EUR/USD and GBP/USD each slipped around 0.3%. USD/JPY also advanced again to the 149.50s range. As a result, the US Dollar Index (DXY) was observed to strengthen its position in the 106.70s range.

NFP Data Improves, US Dollar Remains Strong

NFP data increased by 336k in the September 2023 period, or almost twice as high as the consensus estimate of only 170k. NFP data for the August period was also revised up from 187k to 227k.

The surprise in the NFP data was considered explosive, so market players ignored a number of other disappointing US employment data. The US unemployment rate was recorded as stagnant at 3.8%. Average hourly earnings growth will be just 0.2% in September 2023, or slower than the consensus estimate of 0.3%.

"Given that the Federal Reserve has emphasized that it is data-dependent, this (NFP data) will make the market return to pricing in (the Fed's) interest rate hike on November 1," said Mohamed A. El-Erian, President of Queens' College at Cambridge University and advisor to Allianz.
"Today's extraordinary payrolls data and the upward revision of the August data once again highlight how difficult it will be to short the dollar in (the current) macro environment," said Simon Harvey, head of FX analysis at Monex Europe, "if risk conditions don't take a hit due to the sell-off in Treasury bonds, it is the narrative of US exceptionalism that is supporting the dollar.”

Analysts have increasingly used the term "US exceptionalism" recently. The term refers to the belief that the US economic outlook is much more resilient than that of other major countries.

US exceptionalism has far-reaching implications. The Fed will be able to raise interest rates again and/or maintain high interest rates amidst economic conditions that remain resilient. Meanwhile, other major countries were forced to put the brakes on rate hikes earlier because further interest rate increases threatened to trigger a recession. This means that the fundamentals of the US dollar will continue to be supported by superior interest rates.

The position of various major currency pairs has now reached extreme levels, so the room for the US dollar to rally tends to be limited. However, USD sellers lack the energy to trigger a significant trend change.