Wed, Dec 07, 2022 @ 01:09 GMT
HomeContributorsFundamental AnalysisUS Dollar Index (DXY) Hints at a Swing Low ahead of NFP

US Dollar Index (DXY) Hints at a Swing Low ahead of NFP

The US dollar was the strongest major currency on Wednesday, supported by rising US yields and softer import/export data (which points to a softer global economy). And whilst the prices paid component of the ISM services PMI softened to a 20-month low of 68.8, it remains historically high relative to its long-term average of 59.8 – which suggests the aggressive Fed tightening is yet to make an impact on the inflationary forces of the robust services sector.

NFP in focus for traders tomorrow

The main economic event for the dollar this week is tomorrow’s NFP report. There was some excitement that it may come in soft due to the notable fall in job openings (-9.8%), but ADP employment came in slight above expectations at 208k yesterday.

But it is all to easy to get caught in the noise of individual data prints, so best to take a broader view of underlying trends. The fact is that ADP employment topped in August 2021 and NFP topped in February, meaning both are trending lower. And whilst unemployment remains just above its 2.5 year lows, it did tick higher in August – so another print higher tomorrow suggests the early stages of a rising trend.

Currently NFP is expected to print 250k jobs, down from 308 which would place it at its slowest pace since March 2021. And if there are further signs of weakness in the labour market then it could be taken as a bearish sign for the dollar and yields, so if we want to see the dollar rally from here then a stronger than expected report would certainly help. But it should also be remembered that the dollar remains within a strong uptrend and has had a fairly decent pullback, so it may not take an overly stop NFP report to help it higher either.

US dollar index (DXY) daily chart:

As for the US dollar index (DXY) it is showing the potential for a swing low to form. As noted earlier this week, the bias was for a deeper pullback on the US dollar and to then look for evidence of a swing low. Given the RSI (2) moved below 10 (overbought) ahead of a bullish inside bar occurring above the 2002 highs, I suspect we are at or near a swing low for the dollar. This is also backed up by the fact US yields are also seemingly trying to print a swing low. And a strong NFP report tomorrow could help solidify this near-term bullish bias. The bias remains bullish above 109.35 (below the small consolidation prior to its breakout) and for a move towards 114.0.
DISCLAIMER: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase of sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

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