Dollar Index arrives at major level ahead of NFP

May 6, 2016

As trading unwinds after an unexciting day, the focus is slowly turning to Friday’s US monthly non-farm payrolls report. My colleague James Chen’s NFP preview can be found in THIS article, which contains all the information you need. The long and short of it is that a headline reading of 200,000 jobs created is expected to be seen, with an unchanged rate of unemployment of 5.0% and another 0.3% increase in monthly average hourly earnings. If correct, this would actually be a rather bullish employment report and would most likely increase the odds of a 2016 rate rise, leading to further gains for the dollar. But if the recent trend of weaker US data continues, then expect to see the buck come under renewed selling pressure.

Ahead of Friday’s monthly jobs report, the Dollar Index has reached a key technical area around 93.80-94.00. As can be seen from the daily chart, below, this area was previously support and corresponds with the 61.8% Fibonacci retracement level of the most recent downswing. A short-term downward-sloping trend line meets the 21-day exponential moving average slightly above this area.

Due to the conflux of so many technical indicators in close proximity, there is a danger that the Dollar Index could resume its downward trend from around this 93.80-94.00 area. If so, a revisit of the prior support at 92.65 or the support trend of the bearish channel around 91.90/92.00 would then become highly likely.  

But the fact that the Dollar Index failed to break decisively below the prior low of 92.65 decisively may indicate a change in the trend as there was clearly not sufficient supply for the buck to plummet towards 90. 

However, while below the above-mentioned resistance 93.80-94.00 range, I would still give the sellers the benefit of the doubt in that this could just have been a normal short-term pullback in a downward-trending market.

This bearish outlook could change should the Dollar Index break above this area decisively, though for the long-term trend to also turn bullish the bulls would require a break above the resistance trend of the bearish channel, at around 95.00/96.00 area.

In any event, Friday’s US jobs report could certainly provide the stimulus for a push in one or the other direction.  Ahead of the data, I wouldn’t be surprised to see the dollar weaken after a three-day rally.  

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