DXY: US dollar index under pressure ahead of nonfarm payrolls

By: Crispus Nyaga
Crispus Nyaga
Crispus is an active trader, where he is followed and copied at Capital.com. He lives in Nairobi with his… read more.
on Dec 4, 2020
  • The US dollar index (DXY) has been under pressure in the past few months.
  • Today, focus will shift to the November nonfarm payroll numbers.
  • Analysts believe that the economy added jobs but at a slower pace

The US dollar index (DXY) is holding steady at a two-year low of the important nonfarm payroll numbers that will come out at 13:30 GMT. It is trading at 90.70, which is a few points above yesterday’s low of 90.50.

US dollar index
Dollar index has been in a freefall

Nonfarm payrolls preview

November was a relatively tough month for the US economy as evidenced by the recent economic numbers. The number of Covid-19 cases in the country continued to surge while states started to implement new lockdowns.

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This week, data showed that the manufacturing PMI increased to 56.7 as the number of order flows continued to increase. But yesterday, data from Markit showed that services PMI dropped from 56.6 in October to 55.9 in November.

Therefore, economists believe that that the number of job additions in November were less than in the previous month. The median nonfarm payroll estimate is that the economy added more than 469,000 jobs in November, down from 638,000 in October. While that is the fifth straight month of job additions, the economy still has millions of people out of work.

They also believe that the unemployment rate (U3) fell from 6.9% in October to 6.8% in November. Before the pandemic, this rate was at a multi-year low of 3.9%. The U6 unemployment rate, which includes people working part-time, is expected to remain above 10%.

Most importantly, economists believe that wage growth will fall from 4.5% to 4.3% in November.

Dollar under pressure

The NFP data comes at a time when the US dollar index has been under pressure. After peaking at 103 in March, the index has dropped by more than 11%. It has dropped against most developing and emerging market currencies.

Investors in forexattribute the situation to several factors. First, the appetite for risk has increased as the world gets ready for a Covid vaccine. Second, there is a possibility that the upcoming Biden victory will lead to increased deficit spending.

Third, and most importantly, the decision by the Fed to implement an open-ended quantitative easing program has led to a lack of confidence on the dollar.

Indeed, as I wrote yesterday, analysts from banks like JP Morgan, Morgan Stanley, and Bank of America believe that the dollar weakness will continue.

US dollar index technical outlook

US dollar index
Dollar index chart

On the daily chart, we see that the dollar index has been on a freefall recently. It is trading at a multi-year low of $90.70, and this week, it moved below the important support of $91.71. The downtrend is supported by the descending trendline shown in yellow, moving averages, and oscillators. Therefore, in my view, there are high chances that bears will push it below the psychological level of $90.

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