Get 40% Off
🤯 This Tech Portfolio is up 29% YTD! Join Now to Get April’s Top PicksGet The Picks – Just 99 USD

Dollar Tanks Post NFP: Time To Buy Or Sell?

Published 2019-05-03, 04:13 p/m
Updated 2023-07-09, 06:31 a/m

Daily FX Market Roundup May 3, 2019

Kathy Lien, Managing Director Of FX Strategy For BK Asset Management

On Friday the U.S. dollar turned lower despite good labor-market numbers and the move led investors to wonder if the greenback peaked, paving the way for a bottom in euro, sterling and other major currencies. On a fundamental basis, the USD should be attractive because the American economy is outperforming its peers and the Fed is more hawkish than other central banks but technically, having fallen to multi-month lows, EUR and AUD are vulnerable to a further short squeeze that could take these and other currencies higher. Even though the greenback fell after Friday’s labor-market report, job growth exceeded expectations and the unemployment rate fell to a 49-year low. Nonfarm payrolls increased by 263K in April, up from 189K the previous month and the jobless rate dropped to 3.6%. The dollar fell because wage growth rose less than expected but last month’s release was revised higher and year-over-year, earnings growth is just below the cyclical high. So what this data tells us is that the labor market is tight and finding work is easy but salary gains are limited and American pocketbooks aren’t swelling.

Nonetheless, Fed Chairman Powell’s optimism should not be underestimated. At this week’s FOMC meeting, he said solid fundamentals are supporting the economy as it continues on a healthy path. He dismissed talk of easing, described the Fed’s policy stance as “appropriate right now” and said “we don’t see a strong case for moving in either direction.” While the FOMC statement focused on negatives like low inflation, weaker consumer spending and business investment, Powell downplayed all of these concerns. He acknowledged that inflation has been weaker, but attributed the softness to transitory factors. He also said consumer spending and business investment will most likely pick up and noted that some of the risks they were worried about in March (such as Brexit, Europe and China) have “moderated.” These upbeat comments kicked off a dollar rally so strong that it drove EUR/USD below 1.12 and AUD/USD below 70 cents. While that rally fizzled on NFPs, we believe the dollar remains a buy for 2 main reasons – first the Fed chair made it very clear that when it comes to the economy he sees the glass half full. He expects the outlook to improve as the prior weakness eases. Secondly, he sees no reason to be talking about rate cuts. This view contrasts sharply with other central banks that have recently expressed concerns about growth and talked openly about the possibility of a response to counter that trend. Economic and monetary policy divergences were the reasons for the dollar’s strong gains in April and they should continue to be a source of demand for the greenback. CPI and PPI are scheduled for release this week and with gas prices rising to their highest level since October, the risk is to the upside for these upcoming inflation reports.

Yet when it comes to trading currencies, sentiment and technicals are just as important. USD/JPY has not closed above the 20-day SMA since April 25 and EUR/USD found support above 1.11. We could see further profit taking on long dollar positions before buyers come in again. The next support level for USD/JPY is 110.50 and resistance in EUR/USD is near 1.1270. And while the dollar is a buy, it may pay to wait.

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.