US jobs report to prove to be litmus test for the dollar

Can the dollar build on its gains from yesterday?

There is a good argument going into the non-farm payrolls release later that the dollar has built up expectations of a strong report, in which the threshold for further gains may be even higher than before we got the ADP and jobless claims yesterday.

One thing to note is that the ADP figures have not been an accurate indicator of what to expect with the NFP headline so there is that to consider going into the release later.

For now, the dollar is in good standing but will the gains from yesterday prove to be fleeting? A miss on the headline and softer details may yet spark such a reaction but technically, the greenback is at least safe for now.

EUR/USD is keeping under 1.2200 and GBP/USD is backing away from the 1.4200 level while USD/JPY is holding above 110.00 as well. The near-term charts all point to dollar buyers holding control so sellers have much work to do to gather back momentum.

That said, don’t be surprised if there is a two-pronged reaction to the release later. The kneejerk reaction will depend on the headline but what comes after depends on how the market digests the data in full.

A miss and softer details is likely to see yields pull lower alongside the dollar but there is an argument that such a move may be temporary.

The dollar could have already met a short-term bottom this week as the PBOC has also chosen to rein in yuan gains and also the technical picture is much improved.

The fact that the dollar didn’t break lower against key major currencies could also allude to the selling seeing some exhaustion, so there is some room to correct.

Meanwhile, a strong report later may be more straightforward but is it already baked into expectations from yesterday’s move? Perhaps, but I reckon the market may still have second thoughts in the run up to the FOMC meeting in two weeks’ time.

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