US Dollar Index: Markets Await Fed Clues in US NFP Report

After the September Fed meeting, investors were pricing a high chance of another 50-bps rate cut in November.

However, market participants gradually reduced the likely size of the November rate cut to 25-bps as data revealed a robust economy. At the same time, inflation rose more than expected in September, easing pressure on the Fed to lower rates.

The upcoming nonfarm payrolls report will show the state of the labor sector. Although markets are nearly convinced of the November rate cut, an unexpected number might change the outlook for future rate cuts.

US Dollar Index Technical Analysis

On the technical side, the dollar index has maintained an upward trajectory, trading above the 22-SMA in a bullish trend. At the same time, the RSI has mostly stayed in bullish territory above 50. However, the uptrend has paused after reaching the 104.25 resistance level. For the first time, the price is chopping through the 22-SMA, a sign that the price is currently moving sideways.

Furthermore, while the price climbed to new highs, the RSI dropped, indicating a bearish divergence. The RSI trades in bearish territory below 50, suggesting stronger bearish momentum. Consequently, bullish momentum has dropped, meaning bears can challenge the uptrend.

Currently, the dollar index is trading with the nearest support at 103.50 and the nearest resistance at 104.25. If it remains in this area, it will stay in consolidation. However, if bears strengthen enough to reverse the trend, the price will break below the 103.50 support level to start making lower highs and lows.

A strong catalyst for such an outcome would be a downbeat report on US monthly employment. Moreover, a downtrend would allow the dollar index to revisit the 102.01 support level.

On the other hand, bulls can regain momentum with the right catalysts. If the nonfarm payrolls report beats forecasts, the dollar index might rally to break above the 104.25 resistance level. A new high above this resistance would confirm a continuation of the bullish trend.

Meanwhile, on the daily chart, the dollar index has risen to a solid resistance zone comprising the 0.618 Fib and the 104.00 key level. Moreover, it trades well above the 22-SMA with the RSI near the overbought region, supporting a bullish bias.

Bulls need a strong catalyst to detach from the resistance zone. A break above the zone would allow bulls to set their sights on the 106.00 resistance level. On the other hand, if the price fails to continue higher, bears might take over with a break below the SMA.

In this case, the price would be free to revisit the 102.01 support level. However, bulls might resurface to continue the uptrend if the pullback fails to breach the 22-SMA support.

Key Support Levels

Support 1: 103.50, a recent 4-hour resistance turned support

Support 2: 102.01, a 4-hour and daily support level

Key Resistance Levels

Resistance 1: 106.00, a daily swing high

Resistance 2: 104.25, a recent 4-hour swing high

Resistance 3: 104.00, the current daily swing high

US Dollar Index Fundamental Analysis

On the fundamental side, market participants are awaiting the crucial US nonfarm payrolls report. The US labor sector plays a significant role in driving the rest of the economy. Consequently, the Fed has kept a close eye on job growth and unemployment.

In September, the economy added a robust 254,000 jobs, with the unemployment rate easing to 4.1%. This report was one of the reasons why traders moved to price a smaller rate cut in November.

This month, economists expect a smaller 108,000 jobs addition. Meanwhile, the unemployment rate might hold steady at 4.1%. Better-than-expected figures will imply a more gradual pace of Fed rate cuts, boosting the dollar index. On the other hand, softer figures will solidify rate-cut expectations, weighing on the dollar.

Meanwhile, markets remain cautious ahead of the US presidential election, which might impact the dollar index. A Trump win would boost prices as his policies might drive inflation higher. On the other hand, a Kamala win would unwind the recent Trump trade and likely sink the dollar index.

Final Thoughts

The dollar index has rallied in recent weeks due to upbeat US data. The upcoming US nonfarm payrolls might further shape the outlook for Fed rate cuts. Another blockbuster report will strengthen the dollar. Meanwhile, softer figures will lead to a decline ahead of the FOMC policy meeting.

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