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Talking Points:

- UK PMI Manufacturing (AUG) screams past expectations - why it's not necessarily a reason to get too bullish on the British Pound.

- USDOLLAR Index pausing around key 12000/05 area.

- August is typically a bad month for risk and a good month for the US Dollar - see the August forex seasonality report.

With the USDOLLAR Index trading around a key level of interest dating back to February around 12000/05, it's no surprise that the recent greenback rally has paused ahead of tomorrow's Nonfarm Payrolls report. After all, the recent climb by the US Dollar has been predicated on the belief that the Federal Reserve is a lot closer to raising rates than previously anticipated. While markets are fairly confidence about a 25-bps rate hike by December this year, they're far more skeptical of the Fed hiking later this month.

As such, before the USDOLLAR Index takes its next leg up, it needs a catalyst to help pull forward rate hike expectations even more from their recently elevated levels. Another strong NFP report constitutes the desired catalyst. Yet the Fed seems to be trapping itself in repetative cycle: 1) economic data improves; 2) risk markets rally; 3) Fed signals rate hike; 4) financial conditions tighten; 5) economic data deteriorates; 6) risk markets fall; 7) Fed backs off hawkish tones; 8) financial conditions loosen; 9/1) economic data improves...repeat. We're somewhere between points 3 and 4 in the cycle, in my opinion.

See the video (above) for technical considerations in EUR/USD, GBP/USD, AUD/USD, USD/JPY, and the USDOLLAR Index.

Read more: USDOLLAR at Key Resistance; Euro Hurt by Slipping Inflation Data

--- Written by Christopher Vecchio, Currency Strategist

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

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