US Dollar Index retreats from cycle highs near 110.00 ahead of Payrolls

• The index comes under pressure and recedes from 110.00.
• The risk complex regains some composure and trims recent losses.
• All the attention remains on the August’s Nonfarm Payrolls due later.

The greenback, in terms of the US Dollar Index (DXY), gives away part of the recent advance to fresh cycle highs in the 110.00 region (September 1).

US Dollar Index looks to key data

The index now comes under pressure and sheds some ground following Thursday’s advance to levels last seen back in June 2002 in the 110.00 neighbourhood.

The recent strong climb in the dollar has been underpinned by the equally intense move higher in US yields, particularly in the short end of the curve, which was at the same underpinned by persistent expectations of the continuation of the normalization process by the Federal Reserve.

On the latter, the probability of a 75 bps rate raise at the September event is now at nearly 75% as per CME Group’s FedWatch Tool.

Still looking at the next Fed’s rate hike, Friday’s focus of attention is expected to remain on the release of US Nonfarm Payrolls for the month of August due later in the NA session. Consensus expects the economy to have added 300K jobs during last month and the jobless rate to stay unchanged at 3.5%.

Additional data will also see Factory Orders for the month of July.

What to look for around USD

Despite the ongoing knee-jerk, the greenback keeps the bullish outlook well in place in the area of 20-year highs near the 110.00 zone.

Bolstering the dollar’s strength appears the firm conviction of the Federal Reserve to keep hiking rates until inflation looks well under control regardless of a likely slowdown in the economic activity and some loss of momentum in the labour market. This view was recently reinforced by Chair Powell’s speech at the Jackson Hole Symposium.

Extra volatility in the dollar, however, should not be ruled out considering the ongoing debate around the size of the September’s interest rate hike by the Federal Reserve.

Looking at the more macro scenario, the greenback appears propped up by the Fed’s divergence vs. most of its G10 peers (especially the ECB) in combination with bouts of geopolitical effervescence and occasional re-emergence of risk aversion.

Key events in the US this week: Nonfarm Payrolls, Unemployment Rate, Factory Orders (Friday).

Eminent issues on the back boiler: Hard/soft/softish? landing of the US economy. Prospects for further rate hikes by the Federal Reserve vs. speculation over a recession in the next months. Geopolitical effervescence vs. Russia and China. US-China persistent trade conflict.

US Dollar Index relevant levels

Now, the index is retreating 0.18% at 109.43 and faces the next support at 107.58 (weekly low August 26) seconded by 106.69 (55-day SMA) and then 104.63 (monthly low August 10). On the upside, a breakout of 109.97 (2022 high September 1) would aim for 110.00 (round level) and finally 112.17 (high May 31 2002).