Home ForexForecasts US dollar comes out of hibernation: what’s next?

US dollar comes out of hibernation: what’s next?

by SuperiorInvest

Friday’s US nonfarm payrolls numbers sparked a rally in the dollar. Early last week, the market also responded to the FOMC’s comments with dollar buying. In other words, the two main market drivers were working in the same direction. While the 1.3% rise in the dollar index after the NFP is nothing impressive, it could be the start of a trend.

The US economy added 353,000 in January after 333,000 in December

The U.S. economy added 353,000 jobs in January, after 333,000 in December. The profit was nearly double analysts’ average forecast. Average hourly earnings increased by 0.6% last month after +0.4% previously. Year-to-date gains accelerated to 4.5% from 4.4%, rather than the expected slowdown to 4.1%.

Wage and employment increases are well above long-term growth trends, suggesting the economy is overheating. Economics textbooks tell us that with such inputs, we should expect inflation to accelerate and monetary policy to tighten. But falling commodity prices have slowed inflation, and central bank officials expect it to slow further.

    Average hourly earnings accelerated to 4.5% year-on-year

Average hourly earnings accelerated to 4.5% year-on-year

After Friday’s statistics, the market is pricing in just a 15% chance of a rate cut on March 20, in stark contrast to 90% at the end of December and 80% three weeks earlier. Markets are now 95% confident that the Fed will cut rates by no more than 150 basis points, up from 40% on Jan. 12, when markets were almost as confident of two more cuts.

Therefore, strong macroeconomic data is combined with the Federal Reserve’s conviction that rates will be “higher for longer.” The labor market numbers have markets eagerly looking for signs of accelerating inflation, but now beyond fuel and food.

The dollar index started twice last week from the same point near 102.8. On Wednesday, it was helped by Powell’s clear hint that he did not expect a drop in March. A strong NFP supported Friday’s buying.

DXY surpassed its 200-day MA after NFP

DXY surpassed its 200-day MA after NFP

Just before the FOMC meeting and the day before the NFP, the US currency sold off on the renewed wave of problems at US regional banks, as happened almost exactly a year ago.

Technically, the 50-day dollar index acted as a strong support from which heavy buying began. The DXY crossed from below to above its 200-day moving average on Friday on major news and continued rising on Monday. This looks like the start of a new uptrend after almost three weeks of consolidation. We should be prepared for the DXY to add another 1.5% to 105.7, a level we haven’t seen since early November, ahead of the next inflation report on February 13.

The FxPro Analyst Team

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