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US Dollar Soars as Economic Resilience Gives Fed No Reason to Pivot, NFP Eyed

US Dollar Wrecking Ball, Euro and GBP Under Pressure


US DOLLAR OUTLOOK:

  • U.S. dollar, as measured by the DXY index, surges to its best level since June 2022
  • Better-than-expected U.S. economic data bolsters yields and fuels the greenback’s rally
  • The U.S. labor market report will steal the limelight on Friday

Most Read: S&P 500, Nasdaq 100, Dow Jones Forecast Ahead of Non-Farm Payrolls (NFP)

The US dollar, as measured by the DXY index, hit its best mark since June 2002 on Thursday, coming within striking distance of the110.00 psychological level, after better-than-expected US macro-related data sparked a surge in Treasury yields in the bonds market.

The greenback was already trading higher during European hours, but gains accelerated following the release of the ISM manufacturing survey (PMI). According to the report, August factory activity was unchanged at 52.8, well above expectations for a decline to 52.00, bolstered by an encouraging recovery in the new orders and employment components, a sign that growth is not yet collapsing as many analysts have begun to predict recently.

While it is undeniable that the economy is weakening under the weight of runaway inflation and rising interest rates, the slowdown is not so severe as to suggest that a major crisis is just around the corner; in fact, many indicators continue to point to resilience. The Atlanta Fed’s latest GDP unofficial estimate underscores this view, with the nowcast model forecasting third-quarter output of 2.6% annualized, up from 1.6% last week, a healthy rate of expansion that would not be consistent with the hardlanding narrative.

With the economy holding up well despite various headwinds, the Federal Reserve is likely to deliver additional hikes in line with its guidance to cool demand, while refraining from adopting a rate-cutting strategy prematurely until there is convincing evidence that inflation is headed back toward the long-term goal of 2%. Granted, price pressures are starting to ease, but annual CPI is still running at more than four times the target, signaling that it is too early to pivot to a dovish posture.

For now, the stars seem to be aligning for further U.S. dollar strength in the FX space. This trend could be reinforced if economic indicators continue to evolve favorably. For this reason, traders should keep a close eye on the latest nonfarm payrolls survey to be released Friday. Employers are expected to have added 300,000 workers, but with few signs of layoffs and hiring freezes, the report could easily beat forecasts. That said, a positive surprise could be bullish for the U.S. currency, allowing the DXY index to extend its recent rally.

US DOLLAR (DXY) TECHNICAL ANALYSIS

In terms of technical analysis, the DXY index set a new multi-decade high Thursday after briefly hitting 109.97, a move that allowed the index to accumulate a gain of almost 4% over the past three weeks. While a correction should not be discarded and could come unannounced, the index may still have room to run higher as it does not yet appear extremely overbought according to the 14-day RSI indicator. If we see additional gains, there is no major resistance until 111.75, the upper boundary of a medium-term rising channel in play since November 2021. On the flip side, if sellers return and spark a bearish reversal, initial support comes in at 108.70, followed by 107.50.

DXY TECHNICAL CHART

DXY Chart Prepared Using TradingView

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—Written by Diego Colman, Market Strategist for DailyFX





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