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US Dollar dips as markets await NFP report

  • The US Dollar index plunged below its 20-day SMA, trading below 106.00.
  • Soft labor market data seems to be pushing the buck lower.
  • If economic data continue coming in soft, markets might continue to bet on a more dovish Fed.

The US Dollar (USD) is under significant selling pressure on Thursday as markets gear up for the release of November’s United States (US) Nonfarm Payrolls (NFP) data on Friday. The Greenback’s decline has been driven by weaker-than-expected labor market signals, including a sharp rise in Initial Jobless Claims and an increase in layoffs reported by the November Challenger Job Cuts data. 

Friday’s NFPs from November will set the pace of the USD’s price dynamics for the next sessions.

Daily digest market movers: Buck continues weak ahead of Friday’s NFP

  • The Challenger Job Cuts report for November revealed 57,727 layoffs, higher than October’s 55,597, signaling a concerning uptick in job cuts.
  • Weekly Initial Jobless Claims for the week ending November 29 surged to 224,000, exceeding expectations of 215,000 and up from the previous week’s 215,000.
  • The CME FedWatch Tool now suggests a 70% probability of a 25 basis points (bps) rate cut at the Federal Reserve’s (Fed) December 18 meeting.
  • As the Fed has stated that it remains data-dependant, if NFPs on Friday show weak results, it might start to fully price in a cut in December’s meeting. 

DXY technical outlook: Short-term weakness intensifies, 20-day SMA gone

The US Dollar Index (DXY) broke below its 20-day Simple Moving Average (SMA), marking a critical technical setback that has weakened its short-term outlook. Indicators such as the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) are nearing negative territory, underscoring the growing bearish momentum.

Key support levels now lie at 105.50 and 105.00, while resistance may emerge at 106.50 and 107.00. With the DXY losing steam, market participants will closely watch Friday’s NFP data for any signs of reversal or further deterioration.

Fed FAQs

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.