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US Dollar Rallies After Fed's Preferred Measure of Wage Growth Surprises Stronger
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US Dollar Rallies After Fed's Preferred Measure of Wage Growth Surprises Stronger
Apr 30, 2024 6:12 AM

08:51 AM EDT, 04/30/2024 (MT Newswires) -- The US dollar extended gains over all major currencies in early North American trade on Tuesday after the Federal Reserve's preferred measure of wage growth surprised sharply on the upside of expectations for Q1.

The Employment Cost Index, a leading indicator of wage growth that is closely watched by Fed policymakers, rose 1.2% Q/Q in the March quarter, up from 0.9% previously and ahead of a consensus that had forecast an increase to only 1%.

While the wages component of the index was unchanged at 1.1% for the opening quarter, the uptick in the overall index was stoked by an increase in employee benefit costs. That component increased by 1.1% in Q1, up from 0.7% previously.

With cash labor compensation unchanged in Q1, currency markets may have overreacted to the data in the moments after its release, potentially leaving the dollar rally liable to be unwound. Fed policymakers believe that wage growth can act as a leading indicator of inflation.

EUR/USD unwound an earlier gain before falling to an intraday low of 1.0688 in the moments after the release, from 1.0720 previously, while GBP/USD slumped to 1.2501 from 1.2544 previously. Similar moves were observed in USD/JPY, USD/CAD and many other US dollar pairs.

CME FedWatch Tool shows a 99.5% probability that Fed policymakers will leave the Fed Funds rate unchanged at between 5.25% and 5.5% on Wednesday. However, many analysts also expect the central bank to make minor changes to the quantitative tightening program that is shrinking bond holdings acquired under prior quantitative easing programs.

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