The US dollar index (DXY) has suffered a harsh reversal this week as the greenback plunged against most currencies. It plunged to $104.30, its lowest level since November 6, and about 5.35% from its highest level this week. So, what next for the DXY index ahead of the nonfarm payrolls (NFP) data?
US dollar index falls ahead of US NFP data
This week, the US dollar index continued its strong downward trend as traders waited for the upcoming nonfarm payrolls (NFP) data.
Economists are pessimistic about the job creation in February as business confidence in the United States fell.
This view was confirmed on Wednesday when ADP published the latest private payroll numbers. The report showed that the private payrolls rose by just 77,000 in February, lower than the median estimate of 141,000.
This decline is likely because American companies are concerned about Donald Trump’s policies. While most of them appreciate his deregulation strategies, many of them are concerned about tariffs.
Read more: Target braces for price increases as new Trump tariffs take hold
Economists expect the upcoming NFP data to show that the economy created 156,000 jobs in February, higher than the previous month’s 143k.
They also expect the report to show that the unemployment rate remained at 4.0%, while wage growth held steady.
The official NFP data will likely be weaker than expected because, unlike the ADP report, this one includes the government payrolls. There are chances that the US government has slowed its hiring, while Elon Musk’s Department of Government Efficiency (DOGE) has purged many employees.
Federal Reserve interest rate cuts
The DXY index has plunged as the odds that the Federal Reserve will slash interest rates more times this year as the economic slowdown accelerates. A recent tracking data by the Atlanta Fed hinted that the economy will grow negatively in the first quarter.
The main reason for the economic weakness is the fact that tariffs will have an impact on all parts of the economy.
Trump has added tariffs on all goods imported from its top three trading partners like Canada, Mexico, and China. These tariffs will push more people to abandon major purchases and companies to fire their staff.
US bond yields have pulled back in the past few months, with the 10-year moving to 4.35% and the 30-year and 2-year moving to 4.6% and 4.04%. While they have risen slightly in the past few days, they remain significantly lower than earlier this year.
Therefore, the futures market anticipates that the Federal Reserve will slash interest rates three times this year, with the first cut happening in March.
The next key catalyst for the US dollar index will be the upcoming European Central Bank decision on Thursday. This is an important thing for the DXY index since the euro is its biggest constituent. Analysts expect the bank to cut interest rates by another 0.25%.
DXY index technical analysis
The daily chart shows that the US dollar index peaked at $110.16 earlier this year and has now erased most of those gains. It has dropped to the key point at $104.3, the lowest level since November 8.
The DXY index has slipped below the 50% Fibonacci Retracement level and the 50-day and 200-day Weighted Moving Averages (WMA). Also, the MACD and the Relative Strength Index (RSI) have tilted downwards.
Therefore, the US dollar index will likely drop to the 61.8% retracement level at $104 and then resume the uptrend. More losses will be confirmed if it crashes below that level.
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