Dollar in focus as investors eye key US data

As I mentioned yesterday, the dollar has been all over the place over the past few days. It has staged several breakout attempts, but so far those attempts have been futile. Investors continue to fade the rallies in the dollar in favour of other foreign currencies, amid ongoing reflation trade as Covid cases continue to drop around the world and more economies re-open. But this week hasn’t exactly been a one-way trade for the dollar, with the choppy ride being typical price action during an NFP week. Traders are not willing or comfortable to commit to one particular direction and are quick to take profit. Overall, though, the underlying trend remains the same: bullish for foreign currencies and bearish the US dollar. This trend could extend further in the days ahead, for as long the upcoming US data do not raise inflation concerns again.  In another blow to the US dollar, Russia's $186 Billion Sovereign Wealth Fund has decided to dump all its dollar assets. This comes after the US blamed Russia for a series of cyberattacks.

US data dump

We have a few potentially market-moving data and central bank speeches to look forward to in these last two days of the week – starting with the ADP US employment report at 13:15 BST. The weekly jobless claims will be published at 13:30 and then the ISM services PMI is to follow at 15:00. In addition to the data, we have a few central bank speeches, including from the BoE Governor Baily and FOMC’s Bostic and Quarles.

NFP and central bank speeches coming up on Friday

On Friday, more central bank speeches will follow, including from ECB President Lagarde and RBNZ Governor Orr at the Green Swan 2021 Global Virtual Conference. Then, it is all about the key monthly employment reports from both North American nations, in particular the US. The focus will be on jobs growth as well as wage inflation as speculation continues over the timing of the Fed’s bond purchases reduction. US nonfarm jobs are expected to have risen by a solid 645K after the previous month’s disappointing 266K gain when nearly 1 million was expected.

Could we see a new 2021 low for the dollar?

Source: ThinkMarkets and TradingView.com

From a technical point of view, the dollar index continues to come under pressure from the 21-day exponential moving average, which is indicative of a strong downtrend. The recent lower highs have helped to create a bearish trend line. This means that if in the event the dollar breaks the trend line, we may see a sharp short-squeeze rally as the sellers’ stops are triggered. But given that we are very close to this year’s earlier low at 89.21, I think there is a greater chance for a break down here than a rally. What happens after the index breaks its lows (if it does) that remains to be seen. We could see a quick rejection, which would be a technically bullish sign. Or if there is acceptance below the 89.21 level, then we could see further long-side liquidation in the days to come, leading to a sharp sell-off for the dollar. Either way, buckle up because we are on the verge of a big move, and this week’s NFP data could be the trigger.