Dollar strengthens ahead of NFP

In what would otherwise have been a quiet day ahead of a potentially volatile Friday (due to the release of US monthly jobs report), we did see some sharp moves in three particular major currencies: the British pound and Australian and US dollars. The former fell on growing political uncertainty in the UK, as we reported earlier when looking at the GBP/JPY pair. The Aussie dollar meanwhile also dropped sharply overnight as traders responded to news of an unexpected fall in Australian retail sales for the month of August. The 0.6% fall came as a real surprise as analysts were actually looking for a rebound of 0.3% in sales following a 0.2% decline in July. As the AUD/USD broke back below the 0.7830 support level in response to the data, the AUD/NZD’s rally came to an abrupt halt but this couldn’t helped the NZD/USD pair to cling onto its 200-day moving average support for the third consecutive day. That’s because the NZD/USD also extended its decline in the US dollar’s slipstream. The Dollar Index is now up for the fourth straight week, on the back of mostly positive US data this week. Both the ISM manufacturing and non-manufacturing PMIs, and their employment components, topped expectations, while the ADP private sector payrolls report was in line with expectations. These leading employment indicators suggest that the impact of recent hurricanes on gathering of employment data was probably not as bad as had been feared. Thus, we may see a positive NFP surprise on Friday, which could aid the dollar’s recovery further.

The Dollar Index (DXY) has almost confirmed its reversal formation. The DXY’s breakdown below last year’s low at 91.92 not only proved to be temporary but it ended around the 38.2% Fibonacci retracement level against the long-term uptrend which started in 2008. This is a relatively shallow pullback. If support holds here, it would point to significant continuation in the rally, possibly beyond last year’s high of 103.82 at some stage. This would point to a significant drop in the likes of EUR/USD and NZD/USD exchange rates and possibly a significant rally in the USD/JPY. But let’s not get too ahead of ourselves and lose focus of the short-term outlook. In the short-term, a lot could go wrong which may limit the dollar’s gains – not least a potentially weak jobs report on Friday. Also, from a purely technical perspective, the DXY is yet to break the last swing high prior to its most recent drop, at 94.10. We don’t know if this level will (a) break and (b) hold as support after a potential breakout. But the signs available at this moment in time point to a breakout nonetheless. After all, a bearish trend line has also been taken out. Clearly, the bears are losing control over the dollar’s short-term trend. Is this THE comeback for the dollar, which most people were anticipating to happen earlier in the year?