US Dollar Awaits NFP as September Fed Hike Odds Hang in the Balance

The US dollar heads into today's nonfarm payrolls report at a pivotal moment, with Fed expectations finely balanced and the DXY testing major technical support. While recent ISM data point to a resilient economy, the growing influence of healthcare employment complicates the outlook for headline payrolls.

 

 

Nonfarm Payrolls Could Shape the US Dollar's Next Move

Traders are keeping a close eye on today’s nonfarm payrolls report, as it could determine whether markets price a greater or lesser than 50% chance of a Fed rate hike in September. Fed funds futures have recently pared expectations for two rate hikes by December, with the probability of a September hike sitting at 54.6% at Thursday’s close.

If the NFP report undershoots expectations, it could further reduce those odds and weigh on the US dollar, which is already hovering near several important support levels. Hopes of a US-Iran peace deal have helped send crude oil prices down by around 20% over the past fortnight, dragging the US Dollar Index to a six-week low as lower energy prices dampened inflation expectations.

 

 

 

Why the ISM Services Employment Index May Not Tell the Full Jobs Story

I noted in an article for StoneX that the ISM manufacturing and services PMIs pointed to a broadly resilient US economy, albeit with pockets of weakness. In particular, prices paid remained elevated while the ISM Services Employment index slipped into contraction, which could be interpreted as a warning sign for today's nonfarm payrolls report. However, the relationship between the ISM Services Employment index and headline nonfarm payrolls has become less direct in recent years. The survey still appears to capture cyclical hiring across the private services sector, particularly around turning points, although the signal is increasingly diluted by the growing contribution of healthcare and social assistance employment.

Healthcare has consistently accounted for a large share of monthly payroll gains, allowing headline nonfarm payrolls to remain resilient even when the ISM Services Employment index points to weaker hiring conditions elsewhere. This suggests investors may want to pay closer attention to healthcare employment, given its growing influence on the headline payroll figure.

Source: Supply Management (ISM), US Bureau of Labor Statistics (BLS)

 

Ultimately, I suspect that if there is a surprise, it will be to the upside given the resilience of recent US economic data. That could bode well for US dollar bulls over the near term, even though my core bias remains for a weaker US dollar as the year progresses.

 

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US Dollar Index (DXY) Technical Analysis

I have maintained the view that the US dollar formed a major high in 2022, with the January 2025 peak marking a lower high. I therefore view the rebound from the January 2026 low as corrective and continue to look for evidence that the correction has run its course. It is possible that June marked that high, while last week's bearish outside week—driven by the combined efforts of Japan's Ministry of Finance and the US Treasury—could prove to be another major turning point for US dollar bears.

For now, however, support has emerged around the 200-day EMA and the January trendline. A small bullish candle formed on Thursday above the 200-day EMA, highlighting demand around the key average. If today's nonfarm payrolls report surprises to the upside, it could help the US Dollar Index recover some recent losses and retest the 50-day EMA (100.20), which sits close to the monthly pivot point (100.29).

Even so, the broader price action remains bearish. I am therefore watching for evidence of swing highs around those levels, in anticipation of an eventual break below the 99.00 handle. Such a move would also clear the January trendline, 200-day EMA and May VPOC (Volume Point of Control).

Source: ICE, TradingView

 

 

 

 

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge