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Could job report help US dollar? 3 markets to watch

Summary:

  • US dollar has recovered from the lows on better domestic data
  • The NFP report on Friday crucial for the Fed
  • EURUSD, USDJPY, USDCAD at potential turning points

The US dollar has been struggling for much of this year and this week started with another bout of selling off. Renewed concerns around North Korea pushed bond prices higher and yields lower, which did not help the greenback as it suffered versus the Japanese yen and the euro. USDJPY and EURUSD tested critical levels of 108.25 and 1.2050 respectively but were unable to break them and we have seen a substantial pullback since then. In this analysis we take a look at these two pairs plus USDCAD in the context of Friday’s NFP report.

What to expect from the NFP report?

A revival of the US dollar this week could be attributed to two things: better domestic data and investors’ positioning. While the key NFP report (Friday 1:30pm BST) is still ahead, all the major releases published so far were better than expected. The Conference Board measure of consumer confidence increased in August and remains in proximity of the decade’s highs, GDP for the second quarter was revised higher on stronger consumption, and the ADP report showed the highest increase in private employment in six months. At the same time, speculative positioning in the USD was net negative last week according to the CFTC so better data took some traders by surprise.

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August has been the weakest month for job creation in the US so far during this decade. Will this pattern hold? Source: Macrobond, XTB Research 

The key question is whether the streak could continue. Measures of the labour market indicate that the NFP could be solid as well. However for whatever reason, August was by far the weakest month between 2011 and 2016. Furthermore, investors will pay attention to wage growth that is expected to accelerate from 2.5 to 2.6% y/y. Not much but for the Fed, everything counts. Right now the probability of another hike this year stands at just 30% so a good report could reignite expectations for higher rates.

3 markets to watch

EURUSD

The pair has been in strong bull mode and there has been no major correction over the past few months. However, a retest of 2012 local lows produced a reversal and for now the weekly candle looks like a shooting star, which is typically a reversal pattern.

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EURUSD could see a shooting star formation from the key 1.2050 level on the weekly chart. Source: xStation5 

USDJPY

The USDJPY has been in a mid-term consolidation between 108.25 and 114.30. It saw a very important test of 108.25 support on Monday when yen was gaining on geopolitical tension. However, a strong rebound from that level means that a range mode continues – at least for now.

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USDJPY defended a low at 108.25 and remains in a consolidation. Source: xStation5 

USDCAD

The Canadian dollar has been among the winners against the greenback recently, backed not only by USD weakness but also by hawkish rhetoric from the BoC. The pair reached 1.2450 – a low from April ’16 – but was unable to break lower. A double test of this level means that a double bottom formation is possible here. 

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USDCAD rebounded from the 1.2450 level and a double bottom could be possible here. Source: xStation5 

 

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