A choppy week for the dollar as focus shifts to non-farm payrolls? :: InvestMacro


The mighty dollar prevailed during the first half of 2022, confirming its dominance over all G10 currencies.

The US dollar bulls drew heavy inspiration from risk aversion as geopolitical risks and recession fears drove investors to seek safe haven destinations. Appetite for the currency was also stimulated by expectations of interest rate hikes by the Federal Reserve in the face of rising inflation with higher Treasury yields adding to the bullish gains.

With buying sentiment improving during the first half, this pushed the Dollar Index (DXY) to levels not seen in 20 years.

There was also some action on the US Dollar Equivalent Index which reached its highest level in 2022 at 1.1954 in June.

Given how the bulls dominate the scene in H1, momentum could roll into the second half of 2022 if the underlying forces remain intact. Taking a quick look at the technical indicators, both the dollar index and the equal weighted US dollar index remain strongly bullish on multiple time frames with the path of least resistance north. When considering how crowded the next week will be with major US economic reports and speeches from several Federal Reserve officials, it may be wise to tighten your seat belts for potential dollar volatility.

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Last week, the Federal Reserve Chairman reiterated that the US economy is “well-positioned to withstand tighter monetary policy” during a panel discussion at the European Central Bank Forum. However, he warned of the Fed’s ability to make a “soft landing”. This has fueled recession fears in the US as the central bank wages war against spiraling inflation.

The annual rate of inflation in the United States unexpectedly accelerated to 8.6% in May, the highest level since December 1981 as energy prices jumped to the highest level since September 2005. The blazing figure sent cold water pouring in on the hopes of inflation peaking and fueling speculation of rates Strong interest hikes from the Federal Reserve.

Interestingly, the latest Core Personal Consumption Expenditure (PCE) painted a different picture as inflation showed some signs of easing in May. This was an important development, especially when considering how core PCE is the Fed’s preferred inflation measure. The PCE price index rose 6.3% on a yearly basis which was slightly below market expectations while the core PCE price index fell to 4.7%, down from 4.9% in April. This better-than-expected data may revive hopes about peaking price pressures, cooling bets about violent rallies. With that said, traders are still chasing about a 75% chance of a 75 basis point rate hike at this month’s Fed meeting.

next week …

US markets will be closed on Monday for Independence Day.

With that said, the short week promises to be eventful due to major economic reports and risk events. All eyes will be on the FOMC meeting minutes on Wednesday which could provide fresh insight into policy paths ahead of Friday’s major US jobs report. At its June meeting, the Fed raised interest rates by 75 basis points, the largest rate increase since 1994. The minutes should provide more insight into internal discussions about the decision.

Ahead of Friday’s NFP report, investors will be presented with side dishes in the form of the US ADP’s employment change and initial jobless claims. This will culminate in letters from Federal Reserve officials.

Friday’s main course may or may not satisfy investors depending on the print. Markets expect the US economy to have added 250,000 jobs in June, while the unemployment rate is expected to hold at 3.6%. If the headline non-farm payrolls report meets or exceeds market expectations with the unemployment rate remaining flat or declining, it could allay US recession fears. Alternatively, a lower-than-expected headline non-farm payrolls data coupled with a higher unemployment rate of 3.6% could fuel fears about the US economy heading for a recession ahead.

Dollar breakout on the horizon?

It appears that the equal weighted US Dollar Index may be poised to rise as 1.1950 acts as a major level of interest.

Prices remain bullish on both the weekly and daily time frames. After 1.1950, the next key point can be found at 1.2070. A strong break above 1.2070 could open the door towards 1.2300.

If 1.1950 proves to be a reliable resistance, a dip again towards 1.1700, 1.1640 and 1.1400 could be on the cards.



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