USD Fundamental Outlook: Nonfarm Payrolls Focus, Surprising Data May Boost USD
Summary: The recent weakness in the USD may be short-lived; Citigroup's Economic Surprise Index for the US suggests a tendency for economic data to surprise on the upside, which could boost the USD; this week's heavyweight risk event is focused on Friday's February nonfarm payrolls report.
Over the past week, the USD weakened slightly, with the DXY index falling by 0.7%. More broadly, the S&P 500 index's rise of 1.9% last week was its best weekly performance since January, indicating that sentiment is a key driver of financial markets. This suppressed demand for safe havens. In this optimistic atmosphere, traders may become complacent.
Investors seem to be concerned about comments from Atlanta Fed President Raphael Bostic. He said that the central bank may pause rate hikes this summer. Meanwhile, Richmond Fed President Thomas Barkin noted that there is "no reason" to pause rate hikes "at this point." Given these comments, the market seems to be more dovish, which is not surprising.
Recent CPI and Fed-favored PCE price index data suggest that inflation is slowing down. Last week's ISM wage price index unexpectedly rose, further confirming this. In other words, the cooling of inflation is slowing down. This is not what the Fed wants to see, especially with the labor market still tight.
Speaking of which, all eyes will be on this week's nonfarm payrolls report. It is expected to add 215,000 jobs in February, with the unemployment rate remaining at 3.4%. Most importantly, the labor participation rate is expected to stay at 62.4%. This means that the labor force has not yet recovered to pre-pandemic levels.
A lack of labor supply usually means higher wages, as the number of workers demanded by companies decreases. Citigroup's Economic Surprise Index for the US remains in positive territory and is near its highest level since April 2022. This means that economists have generally underestimated data outcomes.
This opens the door to the possibility of surprising upside in nonfarm payroll data. Such a result may dampen hopes for a pause in tightening policy this summer. The market now prices the federal funds rate near 5.5% by the end of the year. That is, compared to the end of January expectations, the market expects an increase of 50 basis points. Therefore, the disappointment of doves will open the door to USD strength.
This week, two major risk events are coming, focusing on Powell's congressional testimony and the US February nonfarm payrolls report. On the technical front, the short-term direction of EUR/USD is not clear; according to the IG client sentiment index, EUR/USD may soon turn bullish.
Euro/US Dollar Fundamentals: Focus on Powell's Congressional Testimony and US Nonfarm Payrolls Report
Last Thursday (March 2nd), the Eurozone's February CPI data showed that inflation pressures remain high, and the market has fully priced in a 50 basis point interest rate hike by the ECB in mid-March. The ECB's three key rates are currently: deposit facility rate (2.50%), marginal lending facility rate (3.25%), and the main refinancing operations rate (3.0%).
With core inflation in the Eurozone continuing to rise and the ECB continuing to tighten monetary policy, some analysts believe that rates will reach 4.0% by the end of Q2 or early Q3. Although the Eurozone's Q4 2022 GDP growth rate was almost negligible at 0.1%, this has not hindered the ECB from making controlling inflation its top priority.
There are two major risk events to watch this week: first, Federal Reserve Chairman Powell will deliver semi-annual monetary policy reports testimony to the Senate on Tuesday (March 7th) and to the House of Representatives on Wednesday (March 8th); and second, the US nonfarm payrolls report for February will be released on Friday (March 10th).
Powell may reiterate that the Fed's rate hike path will still depend on the specific data and that continuing to raise rates is appropriate. Since the release of January's nonfarm payrolls report, the market's expectations for a Fed rate hike have continued to rise, driving a strong rebound in the US dollar. This data release may again expose the dollar to high volatility.
Euro/US Dollar Technical Analysis: Short-Term Direction is Not Clear
On the daily chart, the Euro/US Dollar is stuck in a range above 1.0600, with direct support and resistance likely to be around 1.0535 and 1.0700, respectively. The short-term direction is not clear, and future trends may depend on this week's major events and next week's ECB interest rate decision.
IG Client Sentiment Index: Likely to Soon Turn to an Uptrend
Euro/US Dollar: According to IG client sentiment data, 53.71% of traders are net long, and the ratio of long to short traders is 1.16:1. The number of net long traders decreased by 11.27% compared to yesterday and by 14.21% compared to last week, while the number of net short traders increased by 13.23% compared to yesterday and by 26.38% compared to last week.
In general, crowd sentiment tends to be a contrarian indicator, and currently, net long positions imply that the Euro/US Dollar may decline. However, the number of net long traders has decreased compared to yesterday and last week, and combined with recent sentiment changes, the Euro/US Dollar is likely to turn to an uptrend.
Operationally speaking, although there appears to be a bearish sentiment in the market, it is often the case that the market takes a contrarian approach, providing support at key levels. In this situation, it may be advisable to enter the market with a small long position, as this goes against the prevailing sentiment. Because this is a contrarian strategy, it is not necessary to take a large position.
Summary: The recent weakness in the USD may be short-lived; Citigroup's Economic Surprise Index for the US suggests a tendency for economic data to surprise on the upside, which could boost the USD; this week's heavyweight risk event is focused on Friday's February nonfarm payrolls report.
Over the past week, the USD weakened slightly, with the DXY index falling by 0.7%. More broadly, the S&P 500 index's rise of 1.9% last week was its best weekly performance since January, indicating that sentiment is a key driver of financial markets. This suppressed demand for safe havens. In this optimistic atmosphere, traders may become complacent.
Investors seem to be concerned about comments from Atlanta Fed President Raphael Bostic. He said that the central bank may pause rate hikes this summer. Meanwhile, Richmond Fed President Thomas Barkin noted that there is "no reason" to pause rate hikes "at this point." Given these comments, the market seems to be more dovish, which is not surprising.
Recent CPI and Fed-favored PCE price index data suggest that inflation is slowing down. Last week's ISM wage price index unexpectedly rose, further confirming this. In other words, the cooling of inflation is slowing down. This is not what the Fed wants to see, especially with the labor market still tight.
Speaking of which, all eyes will be on this week's nonfarm payrolls report. It is expected to add 215,000 jobs in February, with the unemployment rate remaining at 3.4%. Most importantly, the labor participation rate is expected to stay at 62.4%. This means that the labor force has not yet recovered to pre-pandemic levels.
A lack of labor supply usually means higher wages, as the number of workers demanded by companies decreases. Citigroup's Economic Surprise Index for the US remains in positive territory and is near its highest level since April 2022. This means that economists have generally underestimated data outcomes.
This opens the door to the possibility of surprising upside in nonfarm payroll data. Such a result may dampen hopes for a pause in tightening policy this summer. The market now prices the federal funds rate near 5.5% by the end of the year. That is, compared to the end of January expectations, the market expects an increase of 50 basis points. Therefore, the disappointment of doves will open the door to USD strength.
This week, two major risk events are coming, focusing on Powell's congressional testimony and the US February nonfarm payrolls report. On the technical front, the short-term direction of EUR/USD is not clear; according to the IG client sentiment index, EUR/USD may soon turn bullish.
Euro/US Dollar Fundamentals: Focus on Powell's Congressional Testimony and US Nonfarm Payrolls Report
Last Thursday (March 2nd), the Eurozone's February CPI data showed that inflation pressures remain high, and the market has fully priced in a 50 basis point interest rate hike by the ECB in mid-March. The ECB's three key rates are currently: deposit facility rate (2.50%), marginal lending facility rate (3.25%), and the main refinancing operations rate (3.0%).
With core inflation in the Eurozone continuing to rise and the ECB continuing to tighten monetary policy, some analysts believe that rates will reach 4.0% by the end of Q2 or early Q3. Although the Eurozone's Q4 2022 GDP growth rate was almost negligible at 0.1%, this has not hindered the ECB from making controlling inflation its top priority.
There are two major risk events to watch this week: first, Federal Reserve Chairman Powell will deliver semi-annual monetary policy reports testimony to the Senate on Tuesday (March 7th) and to the House of Representatives on Wednesday (March 8th); and second, the US nonfarm payrolls report for February will be released on Friday (March 10th).
Powell may reiterate that the Fed's rate hike path will still depend on the specific data and that continuing to raise rates is appropriate. Since the release of January's nonfarm payrolls report, the market's expectations for a Fed rate hike have continued to rise, driving a strong rebound in the US dollar. This data release may again expose the dollar to high volatility.
Euro/US Dollar Technical Analysis: Short-Term Direction is Not Clear
On the daily chart, the Euro/US Dollar is stuck in a range above 1.0600, with direct support and resistance likely to be around 1.0535 and 1.0700, respectively. The short-term direction is not clear, and future trends may depend on this week's major events and next week's ECB interest rate decision.
IG Client Sentiment Index: Likely to Soon Turn to an Uptrend
Euro/US Dollar: According to IG client sentiment data, 53.71% of traders are net long, and the ratio of long to short traders is 1.16:1. The number of net long traders decreased by 11.27% compared to yesterday and by 14.21% compared to last week, while the number of net short traders increased by 13.23% compared to yesterday and by 26.38% compared to last week.
In general, crowd sentiment tends to be a contrarian indicator, and currently, net long positions imply that the Euro/US Dollar may decline. However, the number of net long traders has decreased compared to yesterday and last week, and combined with recent sentiment changes, the Euro/US Dollar is likely to turn to an uptrend.
Operationally speaking, although there appears to be a bearish sentiment in the market, it is often the case that the market takes a contrarian approach, providing support at key levels. In this situation, it may be advisable to enter the market with a small long position, as this goes against the prevailing sentiment. Because this is a contrarian strategy, it is not necessary to take a large position.