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US Dollar Forecast: NFP Report & FOMC in Focus – USD Trade Levels

US Dollar Forecast: NFP Report & FOMC in Focus – USD Trade Levels

Rich Dvorak, Analyst

US DOLLAR FORECAST HINGES ON UPCOMING NFP REPORT & CHANGES IN FOMC RATE CUT BETS – USD CHARTS & TRADING LEVELS TO WATCH

  • USD price action is set to take the spotlight throughout Friday’s trading session with the NFP report for January 2020 on deck
  • Currency volatility in the US Dollar often runs above-average in response to nonfarm payrolls data as forex traders react to changes in FOMC interest rate expectations
  • The US Dollar could come under pressure if downward revisions to 2019 job gains saps enthusiasm regarding the robustness of America’s jobs market

The release of monthly nonfarm payrolls is due for release Friday, February 07 at 13:30 GMT and the US jobs report will likely be scrutinized heavily by market participants for material changes to the employment situation across America. This brings USD price action into focus for tomorrow’s trading session considering NFP report releases often drive the US Dollar and currency volatility.

CHART OF US NONFARM PAYROLLS HISTORICAL DATA

NFP Report Historical Data Chart

According to the median economist estimate, markets anticipate the headline net change in nonfarm payrolls for January 2020 to cross the wires at +160K jobs, which would be a marginal acceleration from the +145K jobs added over the preceding period.

In addition to monthly employment data typically found in the NFP report, the US jobs market is expected to notch a massive -500K downward revision to employment gains recorded for 2019. This would equate to about -40K lower jobs per month on average than what was originally reported.

CHART OF FOMC INTEREST RATE CHANGE PROBABILITIES

FOMC Interest Rate Change Probabilities Chart

That said, the general direction of the US Dollar may mirror the reaction in FOMC interest rate change probabilities subsequent to the upcoming NFP report release. Overnight swaps are pricing in about 0.33% of interest rate cuts from the Fed by next year from the current target range of 1.50-1.75%.

This compares to the projected median Federal funds rate (FFR) target of 1.6% revealed by FOMC officials at the December 2019 Fed meeting.With the Federal Reserve likely on hold for the foreseeable future, however, the response in USD price action and broader US Dollar Index (DXY) could be relatively muted.

DXY – US DOLLAR INDEX PRICE CHART

DXY Index Price Chart US Dollar Forecast Technical Analysis

There is notable potential that traders will overlook annual revisions to nonfarm payrolls and the monthly headline NFP figure with attention remaining fixated on the current risk-on narrative. This is, of course, barring no material downward surprise in nonfarm payrolls relative to market expectations with enough weight to spark an aggressive repricing of FOMC interest rate cut expectations or rekindle recession fears.

Also, the US Dollar may struggle to find impetus for uptrend continuation even in spite of an overall solid NFP report. This is in light of the daunting technical resistance level faced by the DXY Index around the 98.50 mark. Moreover, the US Dollar is riding the upper channel of its Bollinger Band™, which could make it less likely for further upside in USD price action from a statistical perspective.

CHART OF EXPECTED US DOLLAR VOLATILITY & IMPLIED USD TRADING RANGES (OVERNIGHT)

US Dollar Price Chart USD Forecast Ahead of Nonfarm Payrolls

The jump in implied volatility across the US Dollar and its respective major currency pairs ahead of the NFP report release likely comes as little surprise to forex traders in consideration of the fundamental gravity that nonfarm payrolls data tends to carry.

USD/CAD overnight implied volatility spiked to 7.0%, which is up from its 20-day average reading of 4.1% and ranks in the top 94th percentile of measurements taken over the last 12-months. This is could be due primarily to fundamental event risk also faced by the Loonie tomorrow as outlined on the DailyFX Economic Calendar.

SPOT USD/JPY PRICE CHART

USDJPY Price Chart US Dollar Forecast NFP Report

Spot USD/JPY might also be worth keeping close tabs on throughout Friday’s session with the Dollar-Yen looking ripe for potential range trading opportunities. Judging by USD/JPY overnight implied volatility of 5.9%, spot prices are estimated to fluctuate within a 68-pip range between 109.65-110.33 with a 68% statistical probability. These options-derived support and resistance levels closely correspond to technical confluence underpinned by December 2019 and January 2020 highs.

Read More: Key NFP Charts to Analyze Ahead of the Big Day

-- Written by Rich Dvorak, Junior Analyst for DailyFX.com

Connect with @RichDvorakFX on Twitter for real-time market insight

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

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