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US Dollar Forecast: Jobs Figures, Vaccine Divergence to Drive USD Higher

US Dollar Forecast: Jobs Figures, Vaccine Divergence to Drive USD Higher

Daniel Moss, Analyst


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US Dollar, DXY, EUR/USD, European Central Bank, Federal Reserve – Talking Points:

  • Equity markets traded mixed during APAC trade as investors weighed the impact of recent US data on the Federal Reserve’s path forward for monetary policy.
  • The divergent fundamental backdrops in Europe and the United States may continue to power the US Dollar higher against the Euro in the near term.
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Asia-Pacific Recap

It proved to be a rather mixed day of trade for equity markets during Asia-Pacific trade as investors mulled robust jobs figures out of the US on Friday and whether or not that may influence the Federal Reserve’s outlook on monetary policy moving forward. China’s CSI 300 fell 0.55% and Japan’s Nikkei 225 toppled 1.15%, as tensions between the two nations notable escalate ahead of the US-Japan summit next week. Australia’s ASX 200 jumped 0.84%, buoyed by the RBA’s commitment to provide additional monetary stimulus if necessary in the coming months.

In FX markets, the cyclically-sensitive AUD, NZD and NOK crept cautiously higher, while the haven associated USD, JPY and CHF remained on the back foot. Gold and silver prices rose as yields on US 10-year Treasuries slipped 1 basis-point lower. Crude oil prices rebounded 1% higher.

Looking ahead, Eurozone unemployment figures headline the economic docket alongside Russian inflation figures and Brazilian services PMI data.

DailyFX Economic Calendar

Robust Jobs Numbers, Fiscal Stimulus to Underpin DXY

The US Dollar has slipped lower in recent days against its major counterparts, as robust non-farm payrolls figures stoked risk appetite and weighed on the haven-associated currency. The US economy added 916,000 jobs in March, the most in 7 months and far surpassing expectations of a 647,000 print, on the back of easing restrictions, declining Covid-19 infection rates, rapid distribution of vaccines and robust fiscal support.

ISM Services PMI also pointed to the strongest growth in services activity on record, coming in at 63.7. Well above consensus estimates of a 59 print. This string of better-than-expected economic data buoyed market sentiment and paved the way for the under-fire Euro to peg back lost ground against the Greenback, with the EUR-heavy US Dollar Index (DXY) sliding back to key support at 92.50.

However, this dynamic may prove to be nothing more than a counter-trend pullback, given the divergence in fundamentals between the European Union and United States. Indeed, a resurgence of coronavirus infections, and the resulting tightening of restrictions, in several European nations will likely undermine the Euro in the near term.

ISM Services PMI (1997-Present)

Source – Trading Economics

Moreover, the recent order from the German Constitutional Court preventing President Steinmeier from ratifying the European Recovery Fund, in tandem with the European Central Bank upping its pace of weekly bond purchases, will likely widen the yield spread between German Bunds and US Treasuries.

In contrast, President Joe Biden’s administration is planning on implementing a $2.25 trillion stimulus package later this year, while the Federal Reserve seem relatively unperturbed by the recent rise in longer-term Treasury rates.

Therefore, it appears that the US Dollar Index may continue to press higher in the coming weeks and in turn open the door for the EUR/USD exchange rate to extend its recent slide lower.

US Dollar Index (DXY) Daily Chart – Golden Cross Points to Further Gains

Chart prepared by Daniel Moss, created with Tradingview

From a technical perspective, the US Dollar Index (DXY) appears poised to continue climbing higher in the near term, as price remains constructively perched above 92.50 after failing to breach range resistance at 93.20 – 93.40.

With a bullish Golden Cross taking shape on the moving averages, and the RSI continuing to track its uptrend extending from the December extremes, the path of least resistance seems skewed to the topside.

Remaining constructively positioned above the March 9 high (92.50) likely opens the door for price to retest the yearly high (93.44), with a daily close above needed to bring the 38.2% Fibonacci (94.47) into the crosshairs.

However, if the 23.6% Fibonacci (92.46) gives way, a pullback to the sentiment-defining 144-EMA (91.76) could be on the cards.

EUR/USD Daily Chart – Death Cross Could Intensify Selling Pressure

Chart prepared by Daniel Moss, created with Tradingview

Given the DXY is poised to move higher, and the Euro makes up 57% of the index, further losses could be in the pipeline for the EUR/USD exchange rate.

With a Death Cross moving average formation taking shape, and the RSI continuing to track the downtrend extending from the December extremes, the path of least resistance seems lower.

If buyers fail to drive prices back above the 21-EMA (1.1848), a retest of the yearly low (1.1704) seems more than likely. Clearing that brings support at 1.1610 into play.

On the other hand, bursting back above 1.1850 could ignite a short-term recovery back towards the sentiment-defining 144-MA (1.1958).

-- Written by Daniel Moss, Analyst for DailyFX

Follow me on Twitter @DanielGMoss

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.