The US Dollar faced limited downside pressure following weaker-than-expected US labor market data, as strategists at TD Securities anticipate only modest USD weakness if July payrolls or the unemployment rate disappoint. They expect the US Dollar Index (DXY) to remain above its 200-day SMA near 99, with US-based investors reluctant to build short USD positions until US inflation data softens more convincingly. TD Securities forecasts July Nonfarm Payrolls (NFP) to rise modestly to 70k after a downside surprise of 57k in June, with private job gains likely at 55k and government adding 15k, led by local hiring. The unemployment rate is expected to remain steady at 4.2%, with a slightly higher chance of a decline to 4.1% than an increase to 4.3% [1].
Meanwhile, EUR/USD traded modestly higher, up nearly 0.20% to around 1.1554, as weaker US labor data and lower oil prices tempered Federal Reserve rate hike expectations and weighed on the USD. The DXY traded around 99.70. The ADP Employment Change rose by 44K in July, missing expectations of 70K and slowing from 98K in June. The ISM Services PMI edged up to 54.1 in July from 54 in June, but fell short of the 54.5 forecast. According to the CME FedWatch Tool, traders now price in a 56% chance of a September rate hike, down from 67% a day earlier. Attention is now focused on Friday’s NFP report for further labor market clues [2].
Strategists at Brown Brothers Harriman note that recent FOMC communications suggest participants broadly agree the labor market is in balance but are divided over the durability of the inflation threat. This divergence leaves Fed fund futures more sensitive to inflation than employment data. Lower oil prices, driven by hopes that the Strait of Hormuz could reopen soon, are reducing inflation risks, although US inflation remains above the Fed’s 2% target. Policymakers may therefore maintain a restrictive stance, limiting USD downside. In the Eurozone, falling oil prices could reduce the need for another ECB rate hike, as recent inflation data indicate moderating price pressures after earlier energy-driven surges [2].
TD Securities highlights that an upside payrolls surprise would support further Dollar gains, particularly against GBP and AUD, where long USD positioning is not stretched. Conversely, a payrolls miss or rising unemployment rate would likely result in limited USD downside, with the DXY index expected to stay above its 200-day SMA on the 99-handle [1]. Another upside payrolls surprise could increase market participants' view that US monetary policy is no longer restrictive and the economy is poised for a new growth cycle [1].
CONCLUSION
Despite weaker US labor data and reduced Fed rate hike expectations, the US Dollar remains resilient, with strategists expecting only modest downside and the DXY to stay above key technical levels. The Euro has gained modestly, supported by easing inflation risks and lower oil prices. Market participants are now awaiting Friday’s Nonfarm Payrolls report for further direction, with the potential for an upside surprise to bolster the Dollar.