DXY: Bears jumping the gun ahead of NFP – OCBC

FX markets were somewhat choppy overnight amid mixed US data. ADP employment missing estimates (99k vs. 145k expected) had brought about USD softness but subsequent release of jobless claims (227k vs. 230k) saw a bounce in response. But the USD still turned lower after ISM services data came in largely in line with estimates, OCBC Frances Cheung and Christopher Wong notes.

NFP already weighs on the USD

“This morning, Fed’s Goolsbee said it is pretty clear that the path is not just rate cuts soon but multiple cuts over the next 12 months as Fed has projected in its most recent dot plot. He also cautioned that he saw ‘more’ warning signs about cooling labour market and how persistent weakness raises the possibility that labour market cooling ‘may turn into something worse’. That said, he also said he would not put a lot of weight on one month’s job number.”

“Focus is on payrolls report (830pm SGT), in particular, NFP and unemployment rate. USD should remain sensitive to job data this week given that Fed’s focus has shifted towards supporting labour market. An NFP print that is much hotter than expected and unemployment rate much lower than expect should see dovish bets unwind and is supportive of the USD. A much weaker report further raise concerns about its cooling labour market. This may undermine sentiments. Risk-off trades may pressure high-beta FX.”

“A data that comes in largely in line with estimates would be a case of not good, not bad. This supports soft landing story. US equities can find relief rally while USD can revert back to trading near its lows. This scenario will likely be the least disruptive to markets. DXY was last at 101. Daily momentum is mild bullish but RSI fell. Consolidative price action ahead of data risk. Support at 100.50 levels. Decisive break puts next support at 99.60. Resistance at 101.70 (21 DMA), 102.20 (23.6% fibo retracement of 2023 high to 2024 low).”