Dollar analysis: NFP puts EUR/USD and AUD/USD in focus - Forex Friday

• Dollar analysis: EUR/USD and AUD/USD are two interesting trades to watch
• Dollar analysis: NFP and ISM PMI data could impact Fed narrative
• EUR/USD and AUD/USD technical analysis

Welcome to another edition of Forex Friday, a weekly report in which we highlight selected currency themes. In this week’s report we will discuss the dollar’s outlook and how the upcoming data releases could impact the direction of major pairs like the EUR/USD and AUD/USD.

So far it has been a good week for risk assets, with global indices rebounding strongly and risk-sensitive commodity dollars and some EM currencies all doing well. Underpinning all this has been the decent drop in US bond yields. Following this week’s Fed meeting, it looks like investors are loosening their grip on “higher-for-longer” Fed narrative that had dominated the agenda in the past couple of months. Now, they are looking ahead several months and will be wondering when interest rates will start to be cut again, and by which central bank.

Dollar analysis: EUR/USD and AUD/USD are two interesting trades to watch

Given that the ECB has signalled it too won’t be hiking again, the EUR/USD has not been able to benefit much from the peak Fed interest rates story much. This is hardly surprising as data after data comes out below expectations in Eurozone. On the other hand, the likes of the Aussie dollar have managed to hold their own better and regain some lost ground this week. The Aussie’s performance has been boosted in part because of the positive risk tone this week and with the prospects of a further rate hike from the RBA next week, at the time when the Fed has stopped its hiking.

So, if we see the focus move further away from “higher-for-longer” narrative, then this could boost the appeal of pairs like the AUD/USD, perhaps more so than the EUR/USD. However, if US data continues to show resilience in US economy, then I would favour the short EUR/USD potential more than the downside on the Aussie.

This puts today’s US jobs data into focus, which should determine the near-term direction of bond yields, and thereby EUR/USD, AUD/USD and gold, among other markets.

Dollar analysis: NFP and ISM PMI data could impact Fed narrative

The headline October nonfarm payrolls report is expected to come in around the +180K mark, although it is also important to see whether last month’s impressive +336K figure will get revised, as they usually do. Equally important in so far as the Fed is concerned is wages growth. Consensus sees a +0.3% month-on-month rise in average earnings, which will nonetheless ring the year-on-year rate down to 4.0%. The unemployment rate is seen remaining steady at 3.8%.

If you are thinking to finish trading early today, you may wish to hang around a little longer. The closely watched ISM services PMI data will be due for release at 14:00 GMT, which should also move the dollar in case of a significant deviation from expectations. The PMI is seen remaining around the previous month’s figure of 53.6. As well as the headline front, the devil will be in the detail. Make sure to look into the sub-indices as well to get a better picture of the US economy.

Following this week’s data dump, the week ahead is going to be quieter for US data. The resilience of the US economy and the potential for inflation to remain high for longer is what drove the dollar to new highs for 2023. But we did see some signs of weakness in data this week and if that turns into a trend then we could possibly see a dollar reversal soon. So, the NFP and ISM PMI are key in determining the short-term direction of FX markets. Next week’s US data highlight is on Friday with the release of UoM Consumer Sentiment data.

EUR/USD technical analysis

Short-term support is seen around 1.0580, the head of the hammer candle formed on Wednesday. If we go below this and hold there, this would likely signal the resumption of the bearish trend. On the upside, liquidity above last week’s high at 1.0694 is the next bullish objective.

AUD/USD technical analysis

The key level to watch on the Aussie is at 0.6459, the low from May, which has held as resistance on several occasions in the past. But now the AUD/USD has been building a lengthier base below this level and potentially gearing up for an upside breakout. If it manages to close today’s session above this level, then we could be in for more upside-follow through next week.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R