The US labor market report for May 2023 revealed a significant increase in NFP Data, surpassing consensus estimates by reaching 339,000 jobs created compared to the expected 180,000.

US labor market report released during the New York session on Friday (6/2) failed to bolster expectations of a Federal Reserve (the Fed) interest rate hike this month. However, the NFP data specifically supports the anticipation of rate hikes in the coming months. As a result, the US Dollar Index (DXY) continued to climb, reaching the range of 104.20 in Asian trading on Monday (June 5th).

USD Index (DXY) for Monday (6/5)

The employment report for May 2023 showcased a noteworthy increase in NFP data, with 339,000 jobs added, surpassing the consensus estimate of 180,000. Additionally, the April data was revised upward from 253,000 to 294,000 jobs created.

Unfortunately, other labor market details proved disappointing. The US unemployment rate surged from 3.4% to 3.7%, surpassing the anticipated increase to only 3.5% according to consensus estimates. Furthermore, the average hourly earnings growth recorded a modest 0.3% increase (month-over-month), slower than the consensus forecast.

Market participants believe that such US labor market data supports the inclination of some Federal Reserve officials to wait for additional data before raising interest rates at the upcoming FOMC meeting on June 13th-14th. Simultaneously, the market predicts that the Fed may opt to raise rates at the July  FOMC meeting if subsequent economic data is sufficiently supportive.

These speculations are reflected in the FedWatch CME data. The probability of a Federal Reserve interest rate hike in June has decreased from 2 in 3 last week to 1 in 4 currently. Meanwhile, the likelihood of a July rate hike has surged to 70%.

"The market's feeling is if they skip June and the stock market keeps rallying, the Fed may have to hike possibly multiple times, not just once," said Naka Matsuzawa, chief strategist at Nomura Securities in Tokyo as cited from Reuters. "The dollar still has upside," he continued.

"Apart from strong job creation, the data points to a slowdown in the labor market. This allows the Fed to sit firmly at the FOMC meeting on June 13/14 and pause at least on raising interest rates. The US central bank can then wait and see how things develop and, if necessary, tighten further at a later date," said Christoph Balz, Chief Economist at Commerzbank.

Several upcoming US economic data releases can also influence interest rate speculations and US dollar fluctuations leading up to the FOMC meeting next week. This includes the release of the ISM Non-Manufacturing data later tonight.