US Dollar Bears Lose Their Grip Ahead of NFP, USD/JPY Vols Elevated

The US dollar is showing signs of a bullish reversal ahead of tonight's nonfarm payrolls report, despite a sharp reduction in Fed hike expectations. With Wall Street under pressure and USD/JPY pricing an overnight implied move of 141 pips, NFP could provide the catalyst for the dollar's next directional move.

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US Dollar Bulls Eye NFP Rebound as USD/JPY Volatility Stands Out

Tonight's US nonfarm payrolls report arrives at an interesting time for the dollar. The AI-led selloff on Wall Street saw the Nasdaq plunge 5.5% on Thursday, dragging Treasury yields lower and prompting traders to scale back expectations for another Fed rate hike.

The probability of a December hike fell to around 64%, from 86% the previous session. Yet with inflation still above target and Fed officials maintaining a hawkish stance, another hike remains firmly on the table.

Markets expect 65k jobs to have been added in October, following September's disappointing 29k increase. The broader trend also highlights a cooling labour market, with the 12-month average payroll gain falling to just 41k and annual wage growth slowing to 3%. However, unemployment remains relatively contained at 4.2%, where it is expected to remain tonight. Average hourly earnings are forecast to rise 0.3% m/m.

A stronger report could revive Fed hike bets and support the US dollar, while softer employment and wages could reinforce the recent repricing. However, with risk sentiment deteriorating, safe-haven demand could complicate the dollar's reaction to weaker data.

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Forex Implied Volatility: USD/JPY Leads NFP Expectations

With Fed expectations shifting and risk appetite fragile, options markets are pricing in the potential for elevated volatility around NFP, particularly for the Japanese yen.

USD/JPY stands out with an overnight implied move of 141 pips, around 64% above its 20-day average daily range of 86 pips. AUD/USD is also pricing an above-average move of 66 pips, compared with its 49-pip daily average, while EUR/USD's implied move of 75 pips is also elevated.

Interestingly, implied moves for GBP/USD, USD/CAD and USD/CHF remain below their respective 20-day average daily ranges. That suggests traders are anticipating more volatility in some FX majors than others, with USD/JPY standing out as particularly sensitive to tonight's NFP release.

Source: LSEG

US Dollar Index (DXY): Bullish Reversal Takes Shape Above 50-Day EMA

The daily chart shows three clear waves lower from tis October high. And with prices now holding above the 50-day EMA, with a tweezer bottom and bullish outside day on Thursday, it raises the prospects of a swing low – and the question as to whether we’ve seen the end of a classic ABS correction.

We’d Fed rate expectations to pick up considerably before assuming the US dollar can simply break to new highs in the coming weeks. But we should also factor in the seasonality tends top go against the USD in December, so we’ll focus on its potential to bounce over the near term for now.

But overall, it is a solid uptrend in a bullish channel, holding support with the prospects of a swing low. My bias heading into next week is therefore bullish while DXY holds above.

Source: ICE, TradingView

FX Majors Technical Analysis: Price Action Favours a US Dollar Rebound

Looking through the FX majors reaffirms my suspicion that the USD could strengthen, at least over the near term.

EUR/USD: Formed two shooting star candles, with Thursday’s being an inside day with a slightly bearish close, hinting at a potential swing high below 1.13.
GBP/USD: Failed to push higher despite the BoE rate hike and hawkish MPC votes. Given we’ve already seen a decent rally and Thursday’s shooting star snapped a six-day winning streak, perhaps it's due a pullback.
AUD/USD: Leads the bearish case, with the risk-off tone on Wall Street and the not-so-hawkish RBA raising the prospect of a move towards 69c. This becomes more likely if risk appetite remains sour, coupled with a firm NFP report.
NZD/USD: Formed a potential lower high on Thursday with a volatile shooting star candle, with prices now threatening to retest recent swing lows.
USD/CAD: Is holding above 1.3950 and continues to hint at a swing low. With prices back above 1.40, the upside could be the path of least resistance over the near term, unless NFP data completely misses the mark.
USD/CHF: Formed a rickshaw man doji and inside day on Thursday, signalling a loss of bearish momentum. It's not my favourite pairing, but it helps strengthen the case for a near-term bullish reversal in the US dollar more broadly.
USD/JPY: Remains in a sticky range for now, but dips keep getting bought. Notice that the one-day implied volatility band sits near the week's high, making it a potential upside target for bulls to consider over the near term.

Source: ICE, TradingView

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