US Dollar Forecast: After Another NFP Blowout, Will Markets Abandon Fed Cut Bets?

US DOLLAR WEEKLY FORECAST: NEUTRAL

• The US Dollar weakened cautiously this past week
• Jerome Powell failed quelling summer rate cut bets
• Eyes turn to US CPI data and commentary from Fed

Fundamental Analysis

The US Dollar finished cautiously lower this past week, dented by the Federal Reserve rate decision. The central bank raised rates by 25 basis points and signaled a pause in the tightening cycle. Meanwhile, at his press conference, Chair Jerome Powell tried to stress that the committee outlook does not currently support rate cuts. Did markets believe him? Absolutely not.

After the Fed, markets priced in about a 50% probability of a rate cut by July. Then Friday’s non-farm payrolls report happened. In April, the economy added 253k jobs. Yet again, this was much higher than the 185k outcome. Meanwhile, the unemployment rate unexpectedly fell to 3.4% as average hourly earnings rose 4.4% y/y.

Despite this strong print, overnight index swaps only partially trimmed rate-cut expectations for July. This probability is now down to about 40.5%.

This might leave the US Dollar in a bullish position going forward. We will get some Fedspeak from members John Williams, Christopher Waller, James Bullard and more. If policymakers continue downplaying near-term easing expectations, then the US Dollar could be in for a treat.

Markets will also be paying close attention to the next US inflation report. On Wednesday, CPI is seen holding steady at 5.0% y/y, unchanged from March. Meanwhile, the core print is seen slightly ebbing to 5.5% from 5.6%. Further signs of stickier price pressures could add fuel to the dollar’s rally, especially if risk aversion strikes Wall Street, boosting demand for haven assets.

Technical Analysis

The US Dollar (DXY) continues to hover above a critical range of support. This would be between 100.82 and 101.29. This area is made up of lows from May 2022. Persistent inability to clear this range has continued reinforcing support, increasing the significance of either a breakout or a turn higher. Keep a close eye on the 100-day Simple Moving Average (SMA), which may hold as key resistance in the week ahead. Otherwise, clearing higher exposes the March peak at 105.88.

DXY Daily Chart

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