Let's look at the big picture! What's in store for the USD?Let's look at the big picture! What's in store for the dollar?
Let's analyze the expectations for tomorrow's Non-Farm Payrolls and Unemployment Data. We'll start with economic reasons and market reactions.
A strong downward trend in USD began at the start of last month. The primary driver was the much lower-than-expected non-farm payrolls data and the higher-than-expected unemployment data. During its last meeting, the Fed paused rate cuts. This pause, coupled with the rising unemployment rate and declining payrolls data, sparked recession fears in the market.
Last month, non-farm payrolls came in at 114k, below the 176k expectation, though the 2024 average is 202k. This is comparable to pre-pandemic levels. The real issue is the 4.3% unemployment rate. Since dropping below 4% in 2022, unemployment stayed below that level until May 2024. May saw a 4% rate, June 4.1%, and July 4.3%. This steady increase after two years of being anchored below 4% raised concerns that the economy is cooling more than desired. However, the 2024 average is still below 4% at 3.96%.
This panic has led the market to expect a 50 basis point rate cut at the Fed's September meeting. This is reflected most clearly in the U.S. swap market. The swap market (top right corner of the graph) expects the Fed to make three cuts by year-end, totaling 100 basis points. This suggests one of the cuts, particularly at the September meeting, will likely be a 50 basis point reduction.
The key issue here isn't just that unemployment has risen above 4%. The concern is the steady upward trend over the past three reports. If tomorrow's unemployment data comes in above 4.3% and this upward trend continues, market panic could intensify, and the expectation of a 50 basis point cut in September could be further priced in.
However, the Fed doesn't entirely agree with the market. Powell signaled at Jackson Hole that rate cuts would begin in September, but both his speech and subsequent Fed statements hinted that the September cut would be 25 basis points.
At the end of last year, the market also ignored the Fed and priced in rate cuts too early, only to later align with the Fed. While we are seeing an upward trend in unemployment, the averages remain reasonable and, more importantly, close to pre-pandemic levels. Yes, it seems the time for cuts has come, but we don't expect 100 basis points by year-end as the market does. At best, the Fed may implement three 25 basis point cuts by year-end, and at worst, two cuts.
Service PMI data remains above expectations, and real market participants are not as pessimistic as the swap markets. We've seen multiple times that the Fed doesn't take market expectations as a guide when making decisions.
If tomorrow's unemployment data comes in at 4.3% and non-farm payrolls around 164k, we could see some initial volatility in the dollar, followed by a slight upward trend. In a positive scenario, if the data shows unemployment below 4.3%, the dollar could rally sharply. In a best-case scenario, if unemployment comes in at 4% or lower and non-farm payrolls around 200k or higher, we could see a significant rally.
In a worst-case scenario, unemployment above 4.3% could deepen market panic and solidify expectations of a 50 basis point cut in September, leading to a sharp decline in the dollar.
Technically, looking at the DXY, we see that we are at a significant support level in the bigger picture. This support has only been broken once since 2019, and even then, it didn't hold below this level for long.
The downtrend that began at the end of June appears to have completed its 5th wave at this key support level. Now, it seems we're entering an ABC correction. The correction of the downtrend that began in June has reached the 23.6% Fibonacci level. In major trends, our expectation is for a correction to 23.6%, followed by a retracement in the trend direction and a move to the 38.2% primary correction level as it attracts more trend participants.
Looking at the H4 chart, the short-term downtrend channel has been broken. After reaching the 23.6% primary correction level, the price has retraced to the 61.8% correction level and started finding support in these regions. Depending on tomorrow's data, we could see a retracement to the 78.6% or 0% level, forming a double bottom. If the data is supportive, we could witness a sharp rally towards the confluence of the main downtrend channel and the 38.2% level.
In the event of negative data, based on the increase in unemployment, we could see a decline towards the July 2023 low of 99.60-99.80.
