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

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