US dollar under pressure with August US jobs report poised to provide answer on how much the Fed will cut in September

• The US Dollar continues to enter the countdown to the US Jobs Report for August.
• Investors are wary of the Nonfarm Payrolls report, which could trigger volatility around the US dollar.
• The US dollar index retreats further, nearing its August low of 100.62.

The US dollar (USD) is trading slightly on the back foot on Friday as markets prepare for the most volatile event of the week, the Nonfarm Payrolls (NFP). Markets are increasingly weighing on the possibility of the US Federal Reserve (Fed) opting for a big interest rate cut compared to earlier in the week after a series of labor market data came in less than expected wait. A big miss in the nonfarm payrolls number will confirm that position, while a big beat in estimates could have a spicy outcome, with the US dollar rising and bets on rate cuts quickly being called off.

The Non-Farm Payrolls print will be the main item along with the unemployment rate and average monthly hourly earnings. However, the surprise could come right at the end of the trading day with Federal Reserve Governor Christopher Waller set to speak after the release of the Non-Farm Payrolls print. Fed Waller is known for providing some market-moving comments and could be the one to confirm whether the Fed will opt for a 25 basis point or 50 basis point rate cut in September.

Daily Market Movement Digest: Here Comes the Payroll

• At 12:30 GMT, the US Jobs Report for August will be released by the Bureau of Labor Statistics. Here are the main key aspects to watch for:
  • Nonfarm payrolls are expected to have risen by 160,000, accelerating from 114,000 a month earlier.
  • Average monthly hourly earnings should rise to 0.3% from 0.2%.
  • The unemployment rate should drop to 4.2% from 4.3%.
• Two Fed speakers are on the cards after the release of the US Jobs Report:
  • Federal Reserve Bank of New York President John Williams delivers keynote remarks and participates in a Q&A session on the C. Peter McColough Series on the international economy around 12:45 GMT.
  • Around 15:00 GMT, Federal Reserve Governor Christopher Waller delivers a speech on the US economic outlook and participates in a question-and-answer session at the University of Notre Dame in Indiana.
• Stocks are trading lower again, with Asia already ending this week’s performance in the red. Both European and US stocks are losing ground, albeit by less than 1%.
• The CME Fedwatch tool shows a 59.0% chance of a 25 basis point (bps) interest rate cut by the Fed in September, compared to a 41.0% chance of a 50 basis point cut. Another 25bps cut (if September is a 25bps cut) is expected in November at 29.9%, while there is a 49.9% chance that rates will be 75bps (25bps + 50bps ) below current levels and a 20.2% probability of rates being 100 (25 bps + 75 bps) basis points lower.
• The benchmark US 10-year yield is trading at 3.70%, near this year’s low of 3.66%.

Technical Analysis of the US Dollar Index: How much lower can you go?

The US dollar index (DXY) is the sum of all parts that take place in the markets. Investors are increasingly pricing in the fact that the Fed will have to cut interest rates by more than anticipated a few weeks ago. While an interest rate cut could be granted, recent US economic data still puts the economy on a glide path for a soft landing, meaning the Fed is unlikely to cut aggressively, as doing so would risk causes inflation again.

Looking at key technical levels, the first resistance at 101.90 is starting to look very difficult to overcome, having already triggered a rejection earlier this week. Above, a steep 2% rally would be needed to bring the index to 103.18. Finally, a high resistance level near 104.00 not only holds key technical value, but also carries the 200-day simple moving average (SMA) as a second heavyweight limiting price action.

On the downside, 100.62 (Dec. 28 low) could see a test soon if data supports more rate cuts from the Fed. Should it break, the July 14, 2023 low at 99.58 will be the ultimate level to watch. Once this level breaks, early 2023 levels approach 97.73.

US Dollar Index: Daily Chart