Dollar

While one can argue the greenback has made a short-term peak, the overall dollar forecast remains positive, especially against currencies subject to increased tariff risks from Trump’s administration.

The rationale behind the US stock market rally is that Trump is seen as business-friendly and will be able to pass on his tax cuts through easily without much resistance from the democrats who have lost control of the senate.

Meanwhile, most major foreign currencies remain week, further alleviating pressure on the US dollar. The sharp decline in Chinese markets over the last couple of sessions has put some pressure on commodity currencies. Additionally, the RBNZ cut rates by 50 basis points, sending the kiwi lower.

The greenback is likely to remain on the front-foot while geopolitical risks remain elevated and ahead of the US jobs report on Friday. The latter could then determine which direction the greenback will want to take in the near-term, before the focus turns to US presidential election.

Despite the uptick in wages, this was a rather weak jobs report. Not only did the headline data show only a modest +142K rise in nonfarm jobs in August (vs. +165K expected), revisions reduced reported employment for June and July sharply - by a good 86K.

So far, we have only seen the euro show any signs of strength apart from those where interest rates are lower – JPY, CHF and CNH. The broader US dollar forecast should turn more negative once the equity markets shown signs of stabilisation light of the sharp repricing of US interest rates.

There is one more macro even left that could provide even more volatility in the markets, namely the ISM services PMI on Monday. I reckon once the equity market volatility settles, the recent weakness in US data should translate into a more widespread dollar weakness. So, I maintain a bearish dollar forecast for the week ahead, especially now that we have seen a weaker jobs report today.

The US 2-year bond yield remains support, which is capping the yield at 5% and weighed on the US dollar. And that helped AUD/USD rise for a second day ahead of a key AU CPI report.

The US dollar has risen around 6% from the late December low. And with bond prices approaching support which could send yields lower, the US dollar rally could at least find some headwinds - if not a retracement.

Dollar Index was testing a key support level as focus turns to PPI inflation after a hot CPI earlier this week. US dollar was hurt by weak retail sales on Thursday, but rising import costs is inflationary. The week ahead features global PMIs among a handful of other macro data releases.

Dollar weakness is lacking fundamental justification, with the Dollar Index looking to bounce back as it tests key support, while EUR/USD is back to probe broken support at 1.0780, which could turn into resistance.