US Dollar Index looks cautious around 101.70 ahead of NFP

DXY trades without a clear direction near 101.70.

Activity in US yields remain muted and near Thursday’s close.

US Nonfarm Payrolls, Unemployment Rate next of note in the docket.

The greenback alternates gains with losses around the 101.70 region when measured by the US Dollar Index (DXY) on Friday.

US Dollar Index remains vigilant ahead of Payrolls

Market participants remain vigilant ahead of the publication of the key May’s Nonfarm Payrolls later on Friday, motivating the index to hover around the 101.70 zone amidst the generalized lack of direction in the global markets.

Activity in the US cash markets show the same performance so far, with yields along the curve looking consolidative in the upper end of the weekly range.

As indicated, Nonfarm Payrolls for the month of May are due later in the NA session seconded by the Unemployment Rate and the ISM Non-Manufacturing. Additionally, the final Services PMI is also due followed by the speech by FOMC’s Governor L.Brainard (permanent voter, centrist).

What to look for around USD

The dollar came under pressure in the past session and returned to the area below the 102.00 mark against a cautious backdrop ahead of the release of May’s labour market figures.

Renewed weakness in the dollar came in response to the rising perception that inflation might have peaked in April, which in turn supports the idea that the Fed may not need to be as aggressive as market participants expect when it comes to raising the Fed Funds rates.

In the meantime, the Fed’s divergence vs. most of its G10 peers coupled with bouts of geopolitical effervescence, higher US yields and a potential “hard landing” of the US economy are all factors still supportive of a stronger dollar in the next months.

Key events in the US this week: Nonfarm Payrolls, Unemployment Rate, Final Services PMI, ISM Non-Manufacturing (Friday).

Eminent issues on the back boiler: Powell’s “softish” landing… what does that mean? Escalating geopolitical effervescence vs. Russia and China. Fed’s more aggressive rate path this year and 2023. US-China trade conflict. Future of Biden’s Build Back Better plan.

US Dollar Index relevant levels

Now, the index is retreating 0.01% at 101.72 and faces the next contention at 101.36 (55-day SMA) followed by 101.29 (monthly low May 30) and then 99.81 (weekly low April 21). On the upside, a break above 102.73 (weekly/monthly high June 1) would open the door to 105.00 (2022 high May 13) and finally 105.63 (high December 11 2002).

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Dollar Gains to Two-Year High on Safe Haven Flows

The U.S. dollar posted further gains in early European trade Wednesday, trading at two-year highs on safe haven flows as traders digested slowing global growth, raised geopolitical tensions, and the prospect of more tightening by the Federal Reserve.

At 3:15 AM ET (0715 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% higher at 102.532, the strongest it has been since March 2020 and on course for its best month since 2015.

Russia announced plans to halt gas flows to Poland and Bulgaria from Wednesday amid a standoff over fuel payments, to the benefit of the safe haven dollar.

Russian President Vladimir Putin has decreed that payment from “unfriendly” buyers should be in rubles, helping support his country’s beleaguered currency, while the European Union has responded that would be a breach of sanctions.

This escalation of tensions has added to the reasons traders have chosen to hold the dollar, with strict COVID-19 lockdown in China likely to hit economic growth in the world’s second largest economy while the Federal Reserve is expected to hike interest rates by 50 basis points in May as it seeks to combat inflation at a four-decade high.

EUR/USD fell 0.2% to 1.0618, dropping to a five-year low, amid fears for Europe's energy security, while the weak GfK German consumer confidence index, projected to plunge to a historic low in May, also weighed.

“April has been nasty for the euro, falling over 300 points. The Ukraine war and the hawkish Fed have been a toxic mix for the euro, as investors have dumped the currency and flocked to the safe-haven U.S. dollar,” said Kenny Fisher, an analyst at brokerage OANDA.

USD/JPY rose 0.5% to 127.81, not far removed from its recent 20-year low with the Bank of Japan set to meet overnight.

This central bank has maintained a very accommodative monetary stance, in direct contrast to the hawkish Federal Reserve, but traders see the risk of policy changes to try and arrest the currency's recent weakness.

GBP/USD edged higher to 1.2577, falling to a fresh 21-month low as last week’s weak retail sales data prompted a rethink of the Bank of England’s tightening cycle.

“Tightening expectations for the 5 May BoE meeting have dropped backed to 29bp from 38bp early last week,” said analysts at ING, in a note.

USD/CNY edged lower to 6.5555, with the yuan helped by data showing Chinese industrial profit growth quickened in March, while AUD/USD rose 0.5% to 0.7159 after Australian consumer prices surged at their fastest annual pace in two decades, spurring rate hike speculation.

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