Is the US dollar index (DXY) a buy after the NFP data?

on Aug 5, 2022
  • The US dollar index surged after the latest US non-farm payrolls data.
  • The US economy added over 528k jobs in July this year.
  • The unemployment rate dropped to 3.8% in July.

The US dollar index rose sharply on Friday after the US published a blemish-free non-farm payrolls (NFP) report. The DXY rose by about 1% to $106.76, which was the highest point since Wednesday. It remains a few points below the year-to-date high of over $109.

US non-farm payrolls

The Bureau of Labour Statistics (BLS ) published a strong jobs report that caught most investors off-guard. The agency said that the American economy added over 528k jobs in July this year. This was a major surprise considering that most analysts were expecting the economy to add about 250k jobs. It was also higher than June’s 399k.

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Other numbers revealed that the labour market is still strong. For example, wages rose from 0.4% in June to 0.5% in July on a month-on-month basis. This increase was better than the median estimate of 0.3%. It also translated to a year-on-year increase of 5.2%.

Meanwhile, the US unemployment rate declined from 3.6% in June to 3.7% in July. This figure implies that the economy is still in full employment, which is defined as a period when the unemployment rate is below 5%. 

The DXY index rose as investors predicted that the Federal Reserve will maintain its extremely hawkish tone. Last week, the bank decided to hike interest rates by 0.75%, bringing the year-to-date increases to 225 basis points. As such, analysts expect that the bank will deliver several more hikes this year.

Still, inflation seems to be heading in the right direction. Gas prices, which are a major part of the consumer price index (CPI), has dropped sharply in the past few weeks. The average gasoline price has dropped to about $4. Further, the price of Brent and West Texas Intermediate (WTI) is below the important level at $90.

US dollar index forecast

us dollar index

Turning to the four-hour chart, we see that the DXY index has been in a downward trend after it peaked at $109.3 in July. It has formed a descending channel pattern that is shown in green. The index is slightly below the upper side of this channel. At the same time, the pair has moved slightly above the 25-day and 50-day moving averages.

Therefore, the US dollar index will likely resume the downward trend next week as sellers target the lower side of this channel. If this happens, the next key level to watch will be at $105.

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