Trade Of The Week: Volatile Week For Dollar As Focus Shifts To NFP?

The mighty dollar reigned supreme during the first half of 2022, asserting its dominance over all G10 currencies.

Greenback bulls drew ample inspiration from risk aversion as geopolitical risks and recession fears sent investors sprinting towards safe-haven destinations. Appetite towards the currency was also stimulated by expectations for aggressive Fed rate hikes in the face of soaring inflation with rising Treasury yields fuelling upside gains.

As buying sentiment improved throughout H1, this propelled the Dollar Index (DXY) to levels not seen in 20 years.

There was also some action on the equally- weighted USD Index which hit a 2022 high of 1.1954 in June.

Given how bulls dominated the scene in H1, the momentum could roll over into the second half of 2022 if the fundamentals forces remain intact. Taking a quick look at the technicals, both the Dollar Index and Equally-weighted USD index remain firmly bullish on multiple timeframes with the path of least resistance north. When considering how the week ahead is jam-packed with key US economic reports and speeches from numerous Fed officials, it may be wise to fasten your seatbelts for potential USD volatility.

The low down…

Last week, Federal Reserve Chair reiterated that the US economy was “well positioned to withstand tighter monetary policy” during a panel discussion at the ECB forum. However, he cautioned about the Fed’s ability to achieve a “soft landing”. This has fed into the US recession fears as the central bank wages war against soaring inflation.

Annual inflation rate in the United States unexpectedly accelerated to 8.6% in May, the highest since December 1981 as energy prices jumped the most since September 2005. This red-hot figure poured cold water on hopes of inflation peaking and fuelled speculation of aggressive interest rate hikes from the Fed.

Interestingly, the latest core Personal Consumption Expenditure (PCE) painted a different picture as inflation showed some signs of cooling off in May. This was a significant development, especially when considering how the core PCE is the Fed’s preferred inflation metric. The PCE Price Index rose 6.3% year-over-year which was slightly below market forecast while the core PCE dropped to 4.7%, down from April’s 4.9%. This better-than-expected data may revive hopes around price pressures peaking, cooling bets around aggressive hikes. Nevertheless, traders are still pricing in around a 75% chance of a 75-basis point rate hike at the Fed meeting this month.

The week ahead…

US markets will be closed on Monday for Independence Day.

Nevertheless, the holiday-shortened week promises to be eventful due to key economic reports and risk events. All eyes will be on the FOMC minutes on Wednesday which could provide fresh insight into policy paths ahead of the key US jobs report on Friday. At its June meeting, the Fed raised interest rates by 75 basis points, its biggest rate increase since 1994. The minutes should provide more insight into the internal discussions over the decision.

Before the NFP report on Friday, investors will be served side dishes in the form of the US ADP employment change and initial jobless claims. This will be topped off with speeches from Fed officials.

The main course on Friday could satisfy or dissatisfy investors depending on the print. Markets expect the US economy to have added 250,000 jobs in June, while the unemployment rate is seen holding at 3.6%. Should the headline NFP meet or exceed market forecasts with the unemployment rate holding steady or falling, this could soothe US recession fears. Alternatively, a lower-than-expected headline NFP figure coupled with a higher-than-3.6% unemployment rate could fuel fears around the US economy bound for a recession down the road.

Dollar breakout on the horizon?

It looks like the equally-weighted USD Index could be gearing to push higher with 1.1950 acting as a key level of interest.

Prices remain bullish on the weekly and daily timeframe. Beyond 1.1950, the next key point can be found at 1.2070. A solid breakout above 1.2070 could open the doors towards 1.2300.

Should 1.1950 prove to be reliable resistance, a decline back towards 1.1700, 1.1640, and 1.1400 could be on the cards.