Trade Of The Week: Big Week For Dollar As NFP Looms

The mighty dollar has been an unstoppable force this year, crushing all obstacles with the destructive force of a wrecking ball. G10 currencies were practically pulverized by the greenback’s dominance with the pound shedding roughly 17% and yen over 20% YTD.

After hitting a fresh 20-year high above 114.50 last week, the Dollar Index (DXY) tumbled thanks to a sharp recovery in the euro & pound. Given how the euro makes over 55% and sterling more than 10% of the DXY weighting, any further recovery in both currencies may influence the DXY's direction in the short term.

We also saw some action on the equally-weighted dollar index which failed to secure a weekly close above 1.2800.

Despite the weakness witnessed last week, dollar bulls remain in the driving seat with the fundamentals keeping the engines healthy and running smoothly. However, a fresh catalyst could be needed for bulls to switch into higher gear in the weak ahead…and this could be the highly anticipated US jobs report on Friday.

Taking a quick look at the technical picture, prices remain bullish on the weekly charts as there have been consistently higher highs and higher lows. The DXY could make a new higher low before pushing higher or simply push back above 114.50 to test 114.73 and beyond.

The low down…

King dollar continues to thrive on aggressive rate hike bets and global recession fears.

Last week, a chorus of Fed speakers struck an almost universally hawkish note on rate hikes. We saw the 10-year Treasury move above 4% for the first time since 2008, fuelled by expectations for the Fed to launch more monetary bazookas. As concerns intensified over the hawkish policies by global central banks sparking a recession, investors turned to the dollar as a shelter of safety.

As the first month of Q4 gets underway, dollar bulls have kicked off on a shaky start. Although it has weakened against most currencies, it is still early days. Traders are predicting a 66% probability of a 75-basis point rate hike in November. If this becomes reality, that would mark the fourth consecutive jumbo-sized rate hike in 2022 against the inflation menace. Such a move could inject dollar bulls with renewed inspiration but investors may be more concerned with what happens beyond November and the New year.

Ahead of the Fed’s next policy meeting next month, key US economic data and speeches from Fed officials may influence expectations over how aggressive rates are hiked. Given how the dollar remains highly sensitive to speculation around hikes, this could translate to volatility over the next few weeks.

The week ahead…

It's all about the US jobs report on Friday.

According to Bloomberg, economists are expecting nonfarm payroll growth to slow from a 315k gain in August to 265k in September. The unemployment rate is projected to remain at 3.7% while wage growth is seen hitting 0.3%. If the pending jobs data exceeds market expectations, this may fuel bets over the Fed moving ahead with a 75 basis point rate hike in November. Alternatively, a soft jobs report may reduce the odds of another jumbo-sized move – weakening the dollar while supporting equity markets.

It may be wise to keep a close eye on the numerous speeches from Fed officials throughout the week. If Fed speakers sing a hawkish note and signal more aggressive hikes, this could keep dollar bulls hydrated ahead of the US jobs report. On the other hand, any hint of doves may see  bears enter the scene.

Dollar set to rebound?

After failing to secure a weekly close above 1.2800, the equally-weighted dollar index has edged slightly lower. Nevertheless, the fundamentals remain in favour of bulls and this could limit downside losses.

Bulls need to push back above 1.2800, to open a path back towards 1.2881 and higher. Sustained weakness below 1.2800 may open the doors towards 1.2500 and 1.2184.

Should 1.2500 prove to be reliable support, a rebound back to 1.2800 could be a possibility.