The U.S. dollar, measured by the DXY index, trades in positive territory with solid gains at the end of the week as the U.S. nonfarm payrolls surprised with significant gains in July. Following the NFP report, tightening expectations for the Fed’s September meeting increased, favoring the greenback rally.
At the time of writing, the DXY trades at the 106.50 area, 0.70% above its opening price, after peaking at a daily high of 106.93.
The U.S. Bureau of Labor Statistics revealed that nonfarm payrolls rose by 528,000 in July, more than doubling the market’s consensus of 250,000 and bringing back overall employment above pre-pandemic levels. On the other hand, the unemployment rate edged lower to 3.5% back to February 2020 levels, while the average hourly earnings expanded 0.5%, and the yearly reading stood at 5.2%.
While the FOMC continues its contractive monetary policy cycle, rate hikes could erode consumer spending power and demand, which might cool off the labor market in the following months. Some analysts expect an unemployment rate of 4.9% by the end of the year.
Despite other sectors of the U.S. economy showing signs of weakness, the report showed that the labor market remains strong, so the Fed may have more room to be aggressive in the next September meeting. The market is now pricing a higher likelihood of a bigger hike as they are now pricing a 64.5% probability of a 75 bps increase and a 34.5% of a 50 bps, while the odds of the former stood at 34% before the NFP report.
According to the weekly chart, the long-term technical outlook for the DXY remains bullish and poised to close the week with gains.
On the daily chart, the bias remains neutral, and the DXY stands at a critical level near the 20-day SMA, with its indicators showing a deceleration of the bearish momentum. The daily RSI gained a significant positive slope to jump back above its midline, while the MACD printed a lower red bar, indicating dwindling selling interest.
The DXY needs a break above the 20-day SMA at 106.90 to pick up bullish momentum. That should pave the way to the 107.45 zone and the 108.00 psychological level. On the downside, support levels are seen at 105.05, followed by the 104.75 zone and then the 103.60 area.
