The dollar was trading higher ahead of the publication of the US monthly non-farm jobs report, extending its weekly advance after falling for two consecutive months at the back end of last year, states Fawad Razaqzada of Trading Candles.

European indices and US futures were again pointing lower. The dollar has found support on the back of stronger US data on Thursday with jobless claims and ADP private payrolls both beating expectations. On Friday morning, the greenback gained further ground on the back of a sharper-than-expected 2.5% drop in German retail sales and a weaker Eurozone CPI print of 2.9% vs. 3.0% expected, which hurt the euro and underpinned the dollar index. Attention now turns to the upcoming release of NFP.

Probability of March Fed Cut Drops

At the end of 2023, the market had priced in a March rate cut with almost 90% probability. However, at the start of this year, those odds have started to fall back, with the market now about 66% confident that the Fed will deliver its first trim in the March 20 meeting. As well as the recent pushback by the Fed, investors have realized they may have gotten ahead of themselves in almost fully pricing in a rate cut as soon as March, even though the Fed has indicated the rate cut will come later in the year. So, the dollar’s renewed strength this week has been driven by investors reducing their previously high expectations for a significant dovish shift by the Federal Reserve. They have been a little more doubtful so far this week, as some investors feel that the market may be overestimating the rate cuts.

Stronger Employment Signals Ahead of NFP

Thursday’s stronger ADP and jobless claims data support the view of a later-than-earlier cut, which is why the dollar is refusing to budge, despite its bearish trend over the past couple of months. The ADP non-farm payrolls report printed 164K versus 120K expected, and weekly jobless claims data showed claims for unemployment benefits rose by 202K applications last week, which was well below 217K expected and 220K from the previous week. A day earlier, we saw the employment component of the ISM manufacturing PMI beat expectations. Although at 48.1 it remained below the expansion level of 50.0, it was nonetheless much better than the 45.8 print of the previous month.

As far as the non-farm jobs report is concerned, it displayed notable strength in the previous release, which easily exceeded expectations with almost 200,000 jobs added and a 0.4% month-on-month increase in average hourly earnings. Should employment continue to exhibit robustness, the Fed might find it necessary to postpone rate cuts to prevent a resurgence of inflation. Dollar bears, gold enthusiasts, and stock market bulls will be looking for a weaker print than the 170K expected figure in today’s release. Average hourly earnings are expected to come in at 0.3% month-on-month.

If the Dollar Eases Back, These Are the Currencies to Watch

The dollar could easily resume lower again, given that the Fed has made it clear that the US interest rates could be cut at least three times this year anyway. There’s the potential for upcoming US data to be more subdued, while the potential for a stronger recovery outside of the US could boost the appeal of foreign currencies. We have seen some evidence of a recovery in important economic regions around the world this week, helping some commodity dollars, the pound, and the euro all to attempt a recovery on Thursday after their poor start to 2024. However, on Friday morning, all these currencies were lower, with traders unwilling to hold onto any bearish dollar trades ahead of the jobs report.

Not surprisingly, the Australian dollar, which at the end of last year demonstrated strength, could be a major currency to watch for outperformance should we see strong demand for things like copper and iron ore due to a rebounding Chinese economy. Australia is the leading global exporter of iron ore and one of the major producers of copper. Furthermore, with a rebound in crude oil prices, the Canadian dollar also has the potential to make a comeback. It is also worth watching the Chinese yuan, which underperformed sharply last year. A stronger Chinese economy will also be good news for Eurozone exports, indirectly supporting the euro.

Dollar Index Technical Analysis

The rebound of the DXY at the beginning of this year follows a consecutive two-month decline at the close of the previous year. During that timeframe, it experienced an increase in only two out of the nine weeks. Consequently, the recovery observed so far this week has been primarily driven by profit-taking from oversold levels. Let’s see whether this recovery will diminish as it tests key resistance levels or whether the momentum will carry forward after the jobs report.

As per the chart, the DXY was testing an important resistance area around current levels, between 102.20 to 102.62ish as characterized by the convergence of old support and the resistance trend line of the bearish channel established since the end of October and the beginning of November. Additionally, the 21-day exponential moving average is positioned here, solidifying it as a critical resistance zone.

At the time of writing, it was holding above this area, suggesting the dollar bulls were gaining more control. But it is important to watch the close once the jobs and ISM PMI data are out of the way. If the DXY is still holding onto gains by the close, then the week ahead could see further technical buying in the dollar, while a bearish reversal around these technically important levels would appease the dollar bears.

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