US Dollar manage to salvage the early decline ahead of US Jobs Report

July 5, 2024 1:51 pm

  • The US Dollar retreats for a fourth straight day this week. 
  • Newswires are swamped with UK and French election news ahead of the US Employment Report. 
  • The US Dollar index briefly fell below 105.00 at the start of the European session. 

The US Dollar (USD) dips again on Friday, painting red numbers across the board for the US Dollar against most major currencies. The main adversaries that stand out are the Swiss Franc (CHF) and the Japanese Yen (JPY), which are gaining against the Greenback. The move is evermore strange with European equities in the green at the opening bell, which could point at traders reducing their Greenback exposure ahead of the US Jobs Report. 

On the US economic front, there is only one topic on the bulletin board on Friday: The US Employment report for June. The anticipations are ever high, with the lowest estimate at 140,000 against 237,000 on the upside. Any number thus below 140,000 could trigger a quite voluminous reaction in the Greenback, as the jobs market is being seen as the last man standing in an environment where all other US economic indicators are starting to soften or turn lower. 

Daily digest market movers: Here comes NFP

  • The Labour Party won a landslide victory in the UK, and Keir Starmer is on track to become the next resident at 10 Downing Street. This result is increasingly strange, given the moves to the right in Europe. 
  • Ahead of Sunday’s election in France, the far-right National Rally party of Marine Le Pen is no longer in the position to gain a majority, according to recent polls. 
  • At 12:30 GMT, the US Employment Report for June will be released:
    • Nonfarm Payrolls is expected to decline to 190,000 from 272,000, with the lowest estimate at 140,000 and the highest at 237,000.
    • Average Hourly Earnings are seen increasing by 0.3% in June compared with 0.4% in May.
    • Unemployment Rate is expected to remain stable at 4%.
    • Expect severe market reactions should the Nonfarm Payrolls number come in substantially below the lowest estimation (weaker USD) or jump above the highest (stronger USD). 
  • At 15:00 GMT, the Fed’s Monetary Policy Report will be released. This report is submitted semiannually to the Senate Committee on Banking, Housing, and Urban Affairs and to the House Committee on Financial Services.
  • Asian stocks were unable to close the week on a high note and saw both China and Japan close negative. European equities are doing well on the back of the UK outcome and are jumping higher. The UK FTSE 100 was even up 1% at one given point before falling back to flat ahead of the US session. 
  • The CME Fedwatch Tool is broadly backing a rate cut in September despite recent comments from Fed officials. The odds now stand at 66.5% for a 25-basis-point cut. A rate pause stands at a 27.4% chance, while a 50-basis-point rate cut has a slim 6.1% possibility. 
  • The US 10-year benchmark rate trades at 4.33%, and has printed a fresh weekly low.

US Dollar Index Technical Analysis: Bond market easing

The US Dollar Index (DXY) falls to fresh weekly lows and tests the magic 105.00 level on Friday. In the runup to the US Nonfarm Payrolls release, traders seem to be reducing their Greenback exposure as the markets survey numbers have pencilled in high expectations for June. This could be seen as a sign that it could all end in tears, and the DXY could fall to 104.44 in a nosedive correction when the US labour market is turning softer and joins other recent US data. 

On the upside, the 55-day Simple Moving Average (SMA) at 105.20 has now turned into resistance after an early test during the Asian session received a firm rejection and pushed the DXY further down again to test that 105.00 level. Should that 55-day SMA be reclaimed again, 105.53 and 105.89 are the next nearby pivotal levels. In case the Nonfarm Payrolls report was utterly strong,  the red descending trend line in the chart around 106.23 and April’s peak at 106.52 could come into play. 

On the downside, the risk of a nosedive move is increasing, with double support at 104.77, the confluence of the 100-day SMA and that green ascending trend line from December 2023. Should that double layer give way, the 200-day SMA at 104.44 is the gatekeeper that should catch the DXY and avoid any further declines, which could head to 104.00 as an initial stage in the correction. 

US Dollar Index: Daily Chart

US Dollar Index: Daily Chart

Risk sentiment FAQs

In the world of financial jargon the two widely used terms “risk-on” and “risk off” refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.

Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.

The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.

The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.

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