US Dollar index breaks into fresh highs, US wage inflation key driver

The US Dollar index ends the week with a 'bang', currently establishing its footing well above 94.00 (last 94.20), and not precisely on a positive US NFP headline (worst since 2010 at -33k), which was shrugged off, but on promising US wage figures.

US NFP headlines to be taken with a pinch of salt, wage inflation key

The average hourly earnings came at 0.5% vs 0.3% median m/m in Sept. As ING Economists note, "Hurricane disruption dragged payrolls negative, but a big fall in unemployment and significant wage increases make a December rate hike look probable."

As ING adds: "Despite the softness in payrolls the unemployment rate fell to 4.2% from 4.4%. The other big number is the 0.5%MoM jump in wages – the biggest increase since November 2008 – which takes the annual wage growth number up to 2.9%. Note that there were also some upward revisions to monthly wage rates so we may finally be seeing some of the strength in jobs feeding through into inflation pressures."

Today's bullish reaction in the US Dollar communicates, very clearly, that the market was always expecting the US payrolls to come distorted due to hurricane Irma, thus making the strong wage figures the key data point to watch.

US bond yields make further progress

In response to the pick up in inflation metrics, the DE-US 10-yr yield spread has widened into fresh trend lows, which has been translated into new highs by the US Dollar index. As per the US yield curve, the increase in the 10-yr note has seen a stronger acceleration against the 2-yr note, an event that further anchors the positive interpretation the US data has received by market participants. 

DXY technicals

The key upside hurdle is situated between 94.00 and 94.30, a level that represented a major macro resistance back in August and that bulls are trying to burst through at present. Should clearance off 94.30 be seen, the immediate resistance to be challenged is likely to be 95.00 round number ahead of the 95.50, which coincides with a late June swing low. To the downside, judging by the recent macro data out of the US, higher Fed rate hike odds, the resurrection of the Trump trade, all seems to point that dip buyers will be active at each and every key technical interval.