CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 79% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
US English

Dollar dominance: USD reaction to tight labour market

By Andrew Knoll

07:40, 15 March 2022

People waiting for job interview indoors
Labour market tightening adds to the US inflation puzzle – Photo: Shutterstock

The US labour market has been tightening from various sides over the course of the pandemic and recovery, with ‘The Great Resignation’ persisting against a backdrop of falling unemployment, rising wages, increased demand, soaring commodities, decreased productivity, worker burnout, record inflation and the conflict in Ukraine resonating globally.

Initial jobless claims, total employment/unemployment and other labour statistics were revealed for February and a bit beyond, supplementing insights from another month of staggering consumer price index (CPI) inflation figures.

These figures, together with Tuesday’s producer price index data (PPI) and much more, would inform the US Federal Open Market Committee and Federal Reserve Chairman Jerome Powell as they convene and determine the course of monetary policy, with their meeting set to conclude on Wednesday.

Ukraine war dents growth outlook

“Chair Powell’s press conference will no doubt focus on two key issues: how recent events in Ukraine are impacting the Committee’s views on the economic outlook and monetary policy and, relatedly, any updates to how the Fed is thinking about inflation,” wrote a quartet of Deutsche Bank analysts in a macroeconomic strategy note.

“On the former, given the recency of events, Powell is likely to reiterate that the effects on the economic outlook remain ‘highly uncertain’. He could note that developments have already led to tighter financial conditions and that, along with the sharp rise in commodity prices and potential for adverse effects on confidence – which will both weigh on consumer spending, these forces will dent the growth outlook.”

The impact that a tight labour market and related economic conditions have had on the dollar merits examination.

Macroeconomic data combined with market sentiment drives the value and stability of the dollar, and the US along with much of the world has found itself in some uncharted territory over the past two years. While in the near term the safe-haven strategy of forex investors will continue to favour the dollar along with other stable currencies like the Japanese Yen and Swiss Franc, labour and market conditions could have further-reaching effects.

Labour at a glance

Some experts have described a ‘vicious cycle’ of labour shortages leading to untenable work arrangements and inflated wages, which in turn lead to more resignations, personnel shuffling, exits from the workforce, worker burnout and turnover at play in the US labour market. Rising wages – especially when combined with declining productivity as well as rising product and service demand – contribute to inflationary pressures.

For February, the US Department of Labour reported that total nonfarm payroll employment rose by 678,000 in February, and the unemployment rate edged down to 3.8%.

Initial jobless claims for the week ending 5 March, the most recent report, rose after falling unexpectedly the week prior. That continued a trend of decline following an unexpected rise and then a three-month high in mid-January.

For the week ending March 5, on a non-seasonally adjusted basis, claims rose by 22,025 from the previous week to 218,072. There were notable increases in claims in populous states such as California and New York.

Overall, there have often been more job openings than jobless labourers in the majority of states, exemplifying the worker deficit and tight labour atmosphere.


0.66 Price
-0.090% 1D Chg, %
Long position overnight fee -0.0071%
Short position overnight fee -0.0011%
Overnight fee time 22:00 (UTC)
Spread 0.00006


1.27 Price
+0.200% 1D Chg, %
Long position overnight fee -0.0047%
Short position overnight fee -0.0035%
Overnight fee time 22:00 (UTC)
Spread 0.00013


147.07 Price
-0.270% 1D Chg, %
Long position overnight fee 0.0111%
Short position overnight fee -0.0194%
Overnight fee time 22:00 (UTC)
Spread 0.010


0.66 Price
-0.090% 1D Chg, %
Long position overnight fee -0.0071%
Short position overnight fee -0.0011%
Overnight fee time 22:00 (UTC)
Spread 0.00006

Inflation snapshot

CPI and core CPI both continued their skyward ascents in February, with the headline figure reaching a hair shy of 8% and the core number – which subtracts the cost of food and energy – hitting 6.4%. Both figures continued the now-monthly trend of setting highs since the respective figures were officially tabulated, and both are well above the Fed’s target of around 2%.

For the headline number, the crisis in Ukraine, which broke out at the very end of February, had limited effect and its impact may be felt more saliently in March and perhaps beyond.

Even as the private industry and the federal government have striven to untangle supply chains and adapt to the moving target of pandemic policy and market circumstances, inflation has persisted. Quantitative tapering is likely to accelerate, and the murky future of interest rates looms as the question has become less “if” and more “when and how often”.

“The backdrop to this [FOMC] meeting is unprecedented for a couple of reasons: one, over the past three weeks, Fed funds futures pricing for monetary tightening this year plunged by nearly 50bps (basis points) before completely reversing course and now pricing over 150bps of tightening through year-end,” wrote the DB analysts, who anticipate six rate hikes this year.

“Two, Fed Chair Powell pre-empted the outcome of the meeting by confirming his support for a 25bps hike in his Congressional testimony prior to the meeting,” the analysts added.

The dollar’s position

The US Dollar index (DXY) has climbed to levels unseen since the early 2000s, motivated in large part by investors seeking to limit pitfalls, though risk aversion has not been the only cause of the dollar’s surge.

Powell and the Fed’s eventual and perhaps imminent decision to hike rates has also factored into the dollar’s rise. Along with inflation comes more expensive money in the form of interest-rate hikes that seek to counterbalance inflation. That tends to incentivise foreign exchange and holding.

In turn, rate hikes combined with the dollar’s draw to play-it-safe investors at both the institutional and individual levels could mean that the dollar proves somewhat resistant. 

Relative strength indices slipping further into the overbought range and even some dilution of the dollar’s value at the domestic level due to inflation, including that caused by rising wages and a tight labour market, could move the needle less than under typical conditions. Thus, for its policy implications, particularly those related to interest rates, this week’s Fed meeting is magnified even further in its importance.

“On inflation, we anticipate that Powell will stick to his recent rhetoric about inflation being too high with evidence of broadening price pressures. No doubt developments since the January FOMC meeting, including the spike in rent prices and surge in measures of underlying inflation, should intensify those concerns,” the analysts wrote.

“That said, Powell should continue to emphasise that their baseline forecast sees inflation dissipating over time, helped by monetary tightening, some easing of supply constraints and a fading fiscal impulse.”

Related topics

Rate this article

Related reading

The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
Capital Com is an execution-only service provider. The material provided on this website is for information purposes only and should not be understood as an investment advice. Any opinion that may be provided on this page does not constitute a recommendation by Capital Com or its agents. We do not make any representations or warranty on the accuracy or completeness of the information that is provided on this page. If you rely on the information on this page then you do so entirely on your own risk.

Still looking for a broker you can trust?

Join the 570.000+ traders worldwide that chose to trade with

1. Create & verify your account 2. Make your first deposit 3. You’re all set. Start trading