US Dollar has traders at the edge of their seat, awaiting US jobs report

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  • US Dollar price action remains fairly muted at the start of Friday.
  • US Nonfarm Payrolls and ISM Manufacturing are bound to make waves. 
  • The US Dollar Index is off its weekly low, though any headwind could snap the summer rally in the Greenback.

The US Dollar (USD) is set to “show me the money” with US Nonfarm Payrolls number to be last element to be thrown in the scale that could tip the balance in favor or disfavor of a strogner Greenback. Traders looking back to assess the possible outcome at the end of this Friday will have seen that Wednesday’s data with JOLTS and GDP missing estimates made the scale tip in favor of a weaker US Dollar and quicker rate cuts from the US Federal Reserve. The scale got completely tipped to the other side on Thursday where the preferred inflation gauge of the Fed – the Personal Consumption Expenditures index (PCE) – proved that inflationary forces are still present. 

With the US Nonfarm Payrolls (NFP) number for August and the Institute for Supply Management (ISM) printing its Manufacturing numbers, traders will get a clear picture of where the scale will tip to at the end of this eventful week. The change in the NFP will be the crucial factor, and expectations are that it will land somewhere between 120k and 230k. Any print lower than 120k will be seen as a contraction and thus raise bets for quicker rate cuts and a weaker US Dollar as a result. Any number above 230k will be seen as a tight labor market, which would confirm the stance of the Fed in not cutting interest rates anytime soon. This would then result in a firmly stronger Greenback.

Daily digest: US Dollar to flip to one side

  • In the background commodities are soaring with Crude Oil on a tear. Crude is jumping higher after Kuwait and Saudi crude export numbers point to a multi-year low in exports. 
  • Senate Leader Chuck Schumer said that the focus net week will be on funding, preventing a shutdown. 
  • In Asian trading the Chinese Yuan strenghtend against the Greenback after the People’s Bank of China (PBoC) had cut the Forex Reserve Ratio by 0.02%. 
  • The US jobs report exists out of several key components. Here are the ones you need to look out for at 12:30 GMT: The change in the NFP is expected to head from the previous 187k to 170k. The average MoM Hourly Earnings change is expected to slow down a touch from 0.4% to 0.3%. The overall unemployment rate is expected to stay steady at 3.5%.
  • Around 13:45 GMT, the S&P Global Manufacturing Purchasing Managers Index (PMI) wil be released for the month of August. Expectations are for an unchanged print at 47, which means a contractionary posture remains.
  • Final confirmation from the earlier move on the back of the US Nonfarm Payrolls will come from the ISM Manufacturing PMI for August, which is expected to head from 46.4 to 47. This amounts to a continuation within contraction territory. The Employment Index is expected to stay steady from 44.4 to 44.2 for the next month. The New Orders Index is forecast  to head from 47.3 to 46.3; and, the Prices Paid Index from 42.6 to 43.9.
  • A similar picture to Thursday unfolds in the equity markets with the Japanese Topix index closes at +0.76%. The Hong Kong Hang Seng heads lower by 0.55%. European and US equities are mildy higher but looking for direction. 
  • The CME Group’s FedWatch Tool shows that markets are pricing in an 89% chance that the Federal Reserve will keep interest rates unchanged at its meeting in September. The prior 78% probability was quickly reassessed after the downbeat data from the JOLTS report. 
  • The benchmark 10-year US Treasury bond yield trades at 4.09% and has halted its decline from earlier this week. 

US Dollar Index technical analysis: left or right

The US Dollar is not expected to make any moves until the main event this Friday – the August NFP. A very tight range is expected with possibly a mild tone of US Dollar weakness triggered by a handful of traders that will be trying to pre-position with the idea that the NFP will be weaker. This is due to earlier this week when the ADP private payrolls number was weaker as well. Support at 103 is there and will either trigger another bounce or break and see a lower US Dollar Index for the coming weeks. 

On the upside, 103.74, the high of August 31, comes into play as the level to beat in order to halt this downturn. Once that level is broken and consolidated, look for a surge to 104.00, where 104.35 (the peak of August 29) is an ideal candidate for a double top. Should the Greenback go on a tear, expect a test at 104.47 – the six-month high.

On the downside, the summer rally of the DXY is set to be broken as only one element now supports the US Dollar. That is the 200-day SMA, and it could mean substantially more weakness to come once the DXY starts trading further below it. The double belt of support at 102.38 with both the 100-day and the 55-day SMA are the last lines of defence before the US Dollar sees substantial and longer-term devaluation. 

NonFarm Payrolls FAQs

Nonfarm Payrolls (NFP) are part of the US Bureau of Labor Statistics monthly jobs report. The Nonfarm Payrolls component specifically measures the change in the number of people employed in the US during the previous month, excluding the farming industry.

The Nonfarm Payrolls figure can influence the decisions of the Federal Reserve by providing a measure of how successfully the Fed is meeting its mandate of fostering full employment and 2% inflation.
A relatively high NFP figure means more people are in employment, earning more money and therefore probably spending more. A relatively low Nonfarm Payrolls’ result, on the either hand, could mean people are struggling to find work.
The Fed will typically raise interest rates to combat high inflation triggered by low unemployment, and lower them to stimulate a stagnant labor market.

Nonfarm Payrolls generally have a positive correlation with the US Dollar. This means when payrolls’ figures come out higher-than-expected the USD tends to rally and vice versa when they are lower.
NFPs influence the US Dollar by virtue of their impact on inflation, monetary policy expectations and interest rates. A higher NFP usually means the Federal Reserve will be more tight in its monetary policy, supporting the USD.

Nonfarm Payrolls are generally negatively-correlated with the price of Gold. This means a higher-than-expected payrolls’ figure will have a depressing effect on the Gold price and vice versa.
Higher NFP generally has a positive effect on the value of the USD, and like most major commodities Gold is priced in US Dollars. If the USD gains in value, therefore, it requires less Dollars to buy an ounce of Gold.
Also, higher interest rates (typically helped higher NFPs) also lessen the attractiveness of Gold as an investment compared to staying in cash, where the money will at least earn interest.

Nonfarm Payrolls is only one component within a bigger jobs report and it can be overshadowed by the other components.
At times, when NFP come out higher-than-forecast, but the Average Weekly Earnings is lower than expected, the market has ignored the potentially inflationary effect of the headline result and interpreted the fall in earnings as deflationary.
The Participation Rate and the Average Weekly Hours components can also influence the market reaction, but only in seldom events like the “Great Resignation” or the Global Financial Crisis.

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