USD index on track for its best week in 25 ahead of NFP

I have been quite vocal at the potential for a USD bounce in recent weeks. The fact the USD index held above 100 despite a 50bp Fed cut aggressively dovish market pricing leading up to it clearly showed bears lacked the power to continue driving the dollar lower, after an arguably extended move. And US data overall has not been supportive of a bearish breakout. Furthermore, Fed members have continued to push back against aggressive dovish pricing and that has seen bond yields and the USD rally higher.

In fact, the dollar rally has accelerated so much into NFP I am now left wondering if there is much in the way of a bullish surprise left in today’s report. But with Fed fund futures still trying to price in a 50bp December cut, a decent set of NFP figures could at least support the USD and taper bets to a 25bp December cut.

USD index technical analysis

This week’s rally is currently its best in 25 weeks and on track to snap a 4-week decline. If US data continues to surprise to the upside then the USD index could make its way to 103 in the coming weeks, which is less than we’ve already seen this week alone.

We’ve seen a firm daily close above the 105.50 high, but as we’ve already seen four bullish candles then it may take particularly strong NFP report to send it markedly higher from here over the near term. Besides, as the recent data shows below, odds favour NFP to be below expectations and the previous to also be downgraded. And that could prompt a minor pullback for the USD should that pattern repeat and unemployment remain flat or rise.

Employment data has been mixed this week

ADP payrolls came in much better than expected at 143k versus 124k forecast and 103k prior. And as my colleague David Scutt pointed out earlier this week, ADP figures have been better in recent months at coming into the ballpark of NFP. From this metric alone, could we be in for a hotter NFP figure today?

However, the employment reads for ISM services and manufacturing both contracted (below 50) and were beneath forecasts and the previous reads. Initial jobless claims were also slightly higher than forecast and prior, and the 4-week average was flat around 225k.

NFP job growth is faltering

Regular readers may remember that, over the longer term, NFP jobs tend to exceed expectations more often than not. Since 2007 NFP has beaten forecasts 53.1% of the time, or 63.3% of the time since June 2020 (which was the first positive job growth figure after the pandemic). However, more recently, NFP has underperformed.

Over the past three months NFP has been beneath expectations by -23k on average. With consensus estimates at 125k, NFP could land a lot closer to 100k if that trend persists. But perhaps more importantly, the previous NFP figure has been revised lower on average over the past 3, 6 and 12 months. Perhaps traders need to keep a closer eye on the NFP revision, especially if that is coupled with a soft NFP print for September.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. 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 or sale of any currency or CFD contract. 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. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. 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.

Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex, commodity futures, or digital assets, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to FOREX.com or GAIN Capital refer to StoneX Group Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.

Please note that foreign exchange and other leveraged trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved, seeking independent advice if necessary.

The products and services available to you at FOREX.com will depend on your location and on which of its regulated entities holds your account.

FOREX.com is a trading name of GAIN Global Markets Inc. which is authorized and regulated by the Cayman Islands Monetary Authority under the Securities Investment Business Law of the Cayman Islands (as revised) with License number 25033.

FOREX.com may, from time to time, offer payment processing services with respect to card deposits through StoneX Financial Ltd, Moor House First Floor, 120 London Wall, London, EC2Y 5ET.

GAIN Global Markets Inc. has its principal place of business at 30 Independence Blvd, Suite 300 (3rd floor), Warren, NJ 07059, USA., and is a wholly-owned subsidiary of StoneX Group Inc.