NFP Analysis: Peak inflation is peeking from the clouds, dollar set to fall

• The US reported better than expected job gains but slower monthly wage increases in May. 
• Signs of growing labor supply and falling pay may ease the path of Fed rate hikes. 
• The dollar may swing back down when the dust settles.

Two months of weaker than expected wage increases in a row – is the most important thing for the Federal Reserve, which is fighting inflation. The rest is less important.

The US gained 390,000 jobs in May, better than 328,000 expected, but on top of downward revisions. Real expectations stood at lower levels after the ADP data, and that helps explain the stronger dollar reaction. 

However, Average Hourly Earnings advanced by only 0.3% in May, worse than the 0.4% projected and after another weak increase in April. Slower increases in salaries mean lower price pressures on inflation that the Federal Reserve can influence – the demand side. It cannot impact global and energy prices. 

Moreover, yearly wage growth has slowed to 5.2% from 5.5$. While that fully met economists' expectations, it still reflects a deceleration.

If peak inflation is in sight – or even in the rearview mirror – the Fed may halt its cycle of rate hikes, and weaken the dollar. Once prices pressures ease, the Fed could loosen its pedal from the metal. At the peak of inflation, a mountain is peeking through the clouds, but it might come out to full sight sooner rather than later.

Therefore, I think the knee-jerk reaction in the dollar is unjustified, and it could see suffer substantial losses. The next big text is the Consumer Price Index (CPI) report coming out next Friday. If Core CPI misses estimates, that would provide more proof – revealing another part of the peak in the inflation mountain – and sending the dollar down.