The US dollar index remained under intense pressure ahead of the upcoming nonfarm payroll (NFP) data. It retreated to a low of $105.75, its lowest point since November 12, and 2.20% below the year-to-date high of $108.05.
Why is the US dollar index falling?
The US dollar index, which tracks the greenback against a basket of currencies, has come under pressure as concerns about Trump’s election faded.
In most cases, financial assets often to overreact after a major breaking news and then they stabilize. In this case, the greenback surged after the recent Trump election as concerns about his policies rose.
In particular, investors were worried that some of his policies like mass deportations and tariffs would lead to high inflation. Mass deportations would cause inflation by depraving some key sectors like agriculture and hospitality the labor they need.
Also, tariffs would cause inflation as the importation costs would be passed to consumers.
Therefore, the dollar weakness is a sign that investors expect that these policy actions will not have an immediate impact. For one, carrying out mass deportations will not be easy since the US does not have the workers it needs to carry out them.
Also, Trump is likely using the threat of tariffs to negotiate with countries like Canada, Mexico, and China as he did in his first term.
US jobs data ahead
The US dollar index is also retreating as traders wait for the official jobs numbers. Data released by ADP on Wednesday showed that the private sector created over 146k jobs in November, missing the expected 166k. ADP also revised its October payrolls downwards to 184k.
These numbers meant that the labor market was largely performing worse than expected.
Therefore, focus will be on the official NFP numbers scheduled for Friday. Economists polled by Reuters expect the data to show that the economy created 202k jobs in November, a big increase from the 12k it created a month earlier.
That big increase will be because Boeing’s strike, which contributed to October’s sharp decline, ended in November. The same is true with the hurricanes that happened in October.
The unemployment rate is expected to come in at 4.2%, a small increase from the current 4.1%. Also, the average hourly earnings will be 4.0%.
These jobs numbers are important because they will help the Federal Reserve when it delivers its next interest rate decision. Analysts expect the Fed to either cut rates by another 0.25% or pause. If the NFP numbers come up short of expectations, the Fed will cut, and vice versa.
DXY index analysis
US dollar index chart | Source: TradingView
The daily chart shows that the DXY index retreated from last month’s high of $108.05 to a low of $105.80. It has moved slightly below the key support level at $106.50, its highest swing in April 2024.
The index has also formed what looks like a small head and shoulders pattern, a popular bearish sign. Also, the two lines of the MACD have crossed each other, while the Relative Strength Index (RSI) has pointed downwards.
Therefore, the index will likely continue falling as traders target the next key support at $105. This view will become invalid if the index rises above the key resistance level at $106.50.
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