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How will the NFP data affect the US dollar index (DXY)?

By:
on Jan 6, 2023
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  • The US dollar index has crawled back this week.
  • Fed minutes showed that the committee was still hawkish.
  • The US will publish the latest nonfarm payroll data.

The US dollar index (DXY) drifted upwards on Friday as investors reflected on the recent Fed minutes and the upcoming Non-Farm Payrolls (NFP) data. It rose to a high of $105.43, which was the highest level since December 7. It has risen by more than 1.9% from the lowest level this month.

Fed minutes and NFP data

The most important forex news of this week will be the upcoming Non-Farm Payrolls data from the United States. These numbers will come at a time when many giant companies are slashing their jobs after expanding rapidly during the pandemic.

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Amazon announced that it will slash 18,000 as demand for its e-commerce solutions waned. Similarly, Salesforce said that it will cut 10% of its workers. Other companies that are implementing large-scale layoffs are giants like Twitter and Meta Platforms.

Still, economists believe that the economy is doing well in terms of the labor market. Data published on Wednesday by ADP revealed that the American private sector added more than 215k jobs in December. 

Economists polled by Reuters expect the data to show that NFP expanded by 200k jobs in December after it added over 263k jobs in the previous month. They also expect that the country’s unemployment rate remained unchanged at 3.7% while average hourly earnings dropped from 5.1% to 5.0% in December. 

Strong jobs numbers will give the Fed the impetus it needs to continue hiking interest rates. Minutes published this week showed that most Fed officials believe that more tightening is needed to reduce inflation in the US.

There are signs that inflation will continue falling. As I wrote in this report, natural gas prices have tumbled to the lowest level since 2021. Gasoline prices have also pulled back.

US dollar index forecast

US dollar index
US dollar index chart by TradingView

The 4H chart shows that the DXY index has crawled back in the past few days. This trend happened after the index formed a strong support level at $103.51, the lowest point in December. It has crossed the 50-period moving average while the MACD has moved above the neutral point. The index rose above the descending trendline shown in black.

Therefore, there is a likelihood that the US dollar will continue rising as buyers target the key resistance point at $110. A drop below the support point at $104 will invalidate the bullish view.