Is the US Dollar Index safe to buy after strong NFP data?

on Feb 7, 2022
  • The US dollar index declined sharply last week.
  • The decline happened after hawkish BOE and ECB decisions.
  • We explain what to expect after the strong NFP data.

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The US dollar index (DXY) pair continued its strong performance on Monday morning as focus remained on the latest American jobs data. It is trading at $95.50, which is slightly higher than last week’s low of $95.15.

US NFP data

The Bureau of Labor Statistics (BLS) caught many investors off guard on Friday when it published the latest jobs data. The numbers revealed that the American economy continued doing well in January. 

The US added more than 467k jobs in January while the BLS upgraded its January jobs numbers to more than 500k. 

These numbers were surprising because of two main reasons. First, on Wednesday, an estimate by Automatic Data Processor (ADP) showed that the country’s private sector lost more than 301k jobs in December.

Second, it was a surprise since analysts were expecting a relatively modest pace of job growth. Precisely, analysts were expecting the economy to have created less than 200k in January.

Other data showed that the US unemployment rate rose slightly from 3.9% to 4.0% while the participation rate performed strongly as well. Further, wages kept rising as companies continued competing for talent amid the labor shortage.

Now, there are two key catalysts for the US dollar index. First, analysts will focus on the upcoming American consumer inflation data. Analysts expect the data will show that inflation continued rising in January. Precisely, the median estimate is that the headline CPI jumped to 7.6%. 

Second, the DXY index will react to the ongoing crisis between Russia and western countries. According to the Washington Post, Russia is expected to attack Ukraine in the coming days or months.

Finally, and most importantly, the dollar index will still be affected by the hawkish statement by the Bank of England (BOE) and the European Central Bank (ECB).

US dollar index forecast

dollar index

The four-hour chart shows that the DXY index declined sharply last week after the hawkish decisions by key European central banks. These banks affected the index because of the weight of the euro and pound in the index.

It is trading at $95.60, which is slightly above the key support level at 95.16, which was the lowest level last week. It has also crossed the key resistance at $95.15 and is lower than the 25-day and 50-day moving averages.

Therefore, the index will likely attempt to rebound because of the strong NFP data. The next key level to watch will be at $96.