US Dollar’s Direction Hinges on Fed’s Policy Outlook, US Labor Market Data

US DOLLAR FORECAST:

• U.S. dollar finishes the week marginally weaker, dragged down by risk-on sentiment
• Corporate earnings from mega-cap tech spark a rally on Wall Street
• Next week, attention will turn to the Fed’s monetary policy decision and the nonfarm payrolls report from April

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The U.S. dollar, as measured by the DXY index, retreated modestly this past week, slipping about 0.10% to 101.68, dented by positive sentiment, as equity markets rebounded, with tech stocks commanding strength and leading the charge higher on Wall Street following solid earnings from heavy hitters such as Microsoft and Meta Platforms.

Next week will bring high-impact events that could reinforce the U.S. dollar’s bearish bias, so it is important to closely track the U.S. economic calendar to make more informed trading decisions. That said, there are two things worth keeping an eye on: Wednesday’s Fed monetary policy decision and Friday’s nonfarm payrolls survey.

Focusing first on the U.S. central bank, policymakers are expected to raise interest rates by 25 basis points to 5.00%-5.25% as part of their ongoing efforts to return inflation to the 2.0% target. Considering that this decision is already discounted, the market’s attention will fall primarily on guidance for the forecast horizon.

Last month, the FOMC hinted that its tightening campaign was coming to an end after turmoil in the U.S. banking sector increased risks to the economy and raised the likelihood of recession, so traders should watch for comments on the outlook.

KEY UPCOMING ECONOMIC EVENTS

Source: DailyFX Economic Calendar

If the Fed officially hits the pause button, the U.S. dollar is likely to weaken, as traders attempt to front-run the next moves, which in this case would be rate cuts. With other key central banks, such as the ECB, still seen hiking borrowing costs a few more times this year, monetary policy divergence is expected to play against the greenback.

On Friday, the U.S. employment report will be the main focal point for Wall Street. Data from March, which showed the economy added 236,000 workers, probably overstated strength by not capturing the full impact of the U.S. banking sector crisis, but the April report should correct for this imprecision by better reflecting those developments.

For the aforementioned reason, NFP’s results could disappoint, missing estimates of a gain of 178,000 jobs. In terms of possible scenarios, soft numbers will be bearish for the U.S. dollar by triggering a dovish repricing of the Fed’s policy outlook.

On the other hand, a horrendous report could be positive for the U.S. dollar, at least in the short term insofar as it would scream “recession”, sparking risk aversion. Generally, the U.S. dollar tends to benefit during periods of market turbulence by virtue of its safe-haven qualities.

US DOLLAR (DXY) TECHNICAL ANALYSIS

The U.S. dollar has lacked directional conviction in recent weeks, bouncing off between support at ~100.80 and resistance at ~102.20, as bulls and bears continue to fight for control of the market. So long as this interval holds, price consolidation will persist.

However, if the DXY index manages to breach the current trading range it has been stuck in for two approximately weeks, volatility could pick up, with a bullish breakout (102.20) setting the stage for a rally toward trendline resistance at 102.80 and a bearish breakdown (100.80) exposing the 99.40 area.

US DOLLAR (DXY) INDEX CHART

US Dollar (DXY) Index Chart Prepared Using TradingView