US Dollar Forecast: DXY Drops on Position-Squaring Ahead of CPI, NFP

Dollar Under Pressure as Key Data Week Begins

The U.S. Dollar Index is under pressure on Monday as traders square positions ahead of this week’s key U.S. Nonfarm Payrolls report on Wednesday and Friday’s consumer inflation report. Both reports are expected to have an influence on the next Fed rate decision in March. Today’s price action suggests the numbers will be weak enough to keep the Fed on course for a June rate cut.

At 14:10 GMT, DXY is trading 96.991, down 0.690 or -0.71%.

While the labor market outlook is clear based on last week’s Challenger layoffs report, ADP private-sector hiring, and weekly initial claims, the inflation data are expected to be a little sticky. This is actually helping the central bank buy time before it makes its first cut of the year. It’s also one of the reasons why we haven’t seen the dollar pounded relentlessly by the thought of lower rates.

The general outlook and the daily chart pattern suggest there is just enough strength in the U.S. economy to keep it from collapsing from current levels.

Fed Funds Futures Price In June Cut

Traders don’t quite see it that way, however, as they continue to bet on policy easing from the Fed. As of Friday’s close, Fed Funds futures were pricing in an implied 15.8% probability of a 25-basis point cut on March 18, when the Fed announces its next decision. The odds jump to 51.0% in June.

The chances of a March cut will jump and the dollar will weaken if Wednesday’s NFP report is a complete miss. According to the latest consensus data, the Non-Farm Employment Change is expected to show 70,000 jobs were added to the economy in January, up from 50,000 in December.

Yen Strengthens on Takaichi Election Win

As far as the currencies are concerned, the yen strengthened against the dollar on Monday after Japanese Prime Minister Sanae Takaichi’s election victory. This news is helping to erase six consecutive days of losses as traders bet fiscal stimulus will boost the stock market. More fiscal stimulus could be inflationary, which may bring forward the timeline for Bank of Japan rate hikes. If the BOJ hikes and the Fed cuts, the dollar would likely come under pressure, but this is down the road.

Technical Picture: Downtrend Intact

Technically, the main trend is down. Today’s lower-low made 97.973 a new lower top. A trade through this level will change the main trend to up. A move through 95.551 reaffirms the downtrend.

The intermediate range is 99.492 to 95.551. Its retracement zone at 97.522 to 97.987 stopped the rally on Friday at 97.973, leading to today’s retreat. The new short-term range is 95.551 to 97.973. Its 50% to 61.8% retracement zone at 96.762 to 96.476 is the next downside target. Let’s see if there is a technical bounce or a trade right through it.

Traders should also note that the dollar index is trading on the weak side of the 50-day moving average at 98.306 and the 200-day moving average at 98.569, supporting the bearish tone and providing resistance levels.

More Information in our Economic Calendar.