US dollar licking its wounds ahead of Wall Street close

  • US dollar drops to its knees ahead of key Nonfarm Payrolls this Friday. 
  • Bears lap up a terrible miss in the US ADP report on Wednesday.

The US dollar has come under further pressure on Wednesday as the threat of the Delta variant comes back to the fore as made apparent in the market’s reaction to a major miss in the ADP jobs report. 

At the time of writing,  and as measured against a basket of major currencies, (DXY index), the US dollar is trading near 92.500 and between a low of 92.378 and 92.789, down 0.17% on the day.

The ADP National Employment Report has shown that private payrolls rose by 374,000 in August, up from 326,000 in July but well short of the 613,000 forecasts. 

The data has been perceived to be indicative of a broad cool-down in the labour market recovery amid a persistent worker drought.

There are concerns over the highly contagious COVID Delta variant playing out as the US tops 100,000 hospitalisations for the first time since the winter peak. 

 Five states are nearly out of ICU beds.

The inflow of cases is straining hospitals and pushing health care workers to the brink as deaths have risen to an average of more than 1,000 a day for the first time since March. 

All in all, the data today has dampened prospects of an imminent taper announcement from the US Federal Reserve ahead of this week’s key Nonfarm Payrolls report. 

The dollar is desperate for a lifeline at this juncture following the dovish tone cast out by the Fed’s chair, Jerome Powell

On Friday, Powell made it very clear, again, that while the Fed has probably got to the point where “substantial further progress” has been made on inflation “we have much ground to cover to reach maximum employment”.

This ADP report justifies such a statement and in the absence of more hawkish Fed members speaking, US dollar bulls are left treading a tide that is going out fast. 

Moreover, the lifeline is not likely to come from Friday’s jobs data. Besides the ADP report being a potential prelude, analysts had already chalked up a disappointment. 

”Payrolls probably slowed sharply after a 943k surge in July,” analysts at TD Securities said.

”The pattern reflects less help from the seasonal adjustment process, particularly for the government sector, but underlying momentum appears to have faded as well.”

”That is the signal from the Homebase data, even as claims have been falling. Slowing would help the case for no tapering announcement in September,” the analysts argued. 

Deutsche Bank US economists also think that ”the pace of hiring will slow somewhat after the strong report in July.”

However, the +700k increase in nonfarm payrolls that they’re forecasting should be more than sufficient to keep the Fed on track to announce tapering at the November FOMC meeting.

”In turn, that jobs growth should see the unemployment rate fall to a fresh post-pandemic low of 5.2%,” it was argued. 

DXY & 10-Year yield technical analysis

Meanwhile, from a technical perspective, considering the bulls failed to close above 93.50 last week, nor for month-end, should the data really disappoint, the DXY could be looking into the abyss from a longer-term perspective:

The DXY index is already in the red by some 0.23% at the time of writing and has moved in on a critical structure near the June highs which might be regarded as the last defence before 91.80:

As for the US 10-year yield, from a daily outlook, it too is critically close to the edge:

The current support structure is guarding a drop to 1.2210  the last defence for the double bottom lows and a downside continuation below there. 

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