Payrolls vs CPI and How Two Data Releases Steer the U.S. Dollar

Payrolls and CPI form a back-to-back test for the U.S. dollar, with labor market data shaping Federal Reserve rate hike expectations first and inflation data following as the next major catalyst. The private ADP employment report set the tone by coming in at 86,000 against an expected 69,000, ahead of the broader nonfarm payrolls release. Markets are largely pricing a Federal Reserve rate hike, so each release either reinforces or tests that expectation. The U.S. dollar index, meanwhile, has recovered a sharp pullback around the U.S. midterm elections and remains inside its broader yearly uptrend.

Michael Boutros, StoneX Media Senior Market Analyst at StoneX, covers currencies, commodities and equity indices through a multiple time frame, event-driven lens. That coverage gives insight into how nonfarm payrolls, CPI and Federal Reserve rate expectations are driving the U.S. dollar index.

Key Themes

• ADP private payrolls beat expectations at 86,000 versus 69,000, ahead of the broader nonfarm payrolls report.
• Markets largely price a Federal Reserve rate hike, and labor data either reinforces or limits that expectation.
• U.S. CPI follows nonfarm payrolls as the next major catalyst for the U.S. dollar index.

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Nonfarm Payrolls Steer Federal Reserve Hike Bets and the U.S. Dollar

Nonfarm payrolls steer the U.S. dollar because the labor market reading feeds directly into Federal Reserve rate hike expectations, which markets already largely price in. A stronger employment reading, according to Boutros, does "leave the door open for the Fed to move forward" and reinforces the expectation for a hike. "The risk would be if the employment labor market data comes out weaker than expected. That might limit the willingness of the Fed to really move aggressively to hike," he says. The unemployment rate, widely expected to hold steady, completes the labor picture alongside the headline hiring figure. Consequently, the nonfarm payrolls report sets the starting point for rate expectations before the inflation data arrives.

U.S. CPI Extends the Dollar's Payrolls Test Into a Second Release

The U.S. CPI inflation report follows nonfarm payrolls as the next major catalyst for the U.S. dollar index, turning a single jobs release into a two-step test of Federal Reserve expectations. In Boutros's words, "another inflation update would be the next major catalyst here for the DXY." Payrolls speak to the labor side of the Federal Reserve's decision, whereas CPI speaks to inflation, so rate expectations formed around the jobs report meet a fresh reading before policymakers act. For the U.S. dollar index, the reaction to payrolls is therefore a first read on rate expectations rather than the final word.

U.S. Dollar Signals Surface in ADP, Payrolls, Unemployment and CPI

The signals that show how payrolls and CPI are steering the U.S. dollar surface in the ADP private payrolls report, nonfarm payrolls, the unemployment rate, the CPI inflation update and market pricing for a Federal Reserve rate hike. ADP offers an early read on private hiring, although it is typically variable relative to the broader nonfarm payrolls report. The unemployment rate rounds out the labor picture, while rate hike pricing shows how much of the Federal Reserve outcome markets have already absorbed. On the chart, daily and weekly closes around key support show how the U.S. dollar index is responding to the data within its yearly uptrend.

--- Written by Frédéric Guétin, StoneX Media Producer

--- Expert: Michael Boutros, StoneX Media Senior Market Analyst