The dollar dipped on Thursday following the decline in Treasury yields, ahead of the key U.S. nonfarm payrolls report on Friday. Strategists expect the pullback may be temporary, as they looked for potential catalysts in the report.
The dollar index reached an 11-month peak of 107.34 earlier this week but dropped by 0.4 percent to 106.34.
Despite this decline, the dollar index remained on course for its 12th consecutive week of gains. FX Street reported that the dollar index was trading higher and testing a resistance level. The MACD shows that bullish momentum is decreasing. The relative strength index (RSI) was at 69, indicating that the index might enter the overbought territory.
Meanwhile, longer-term U.S. Treasury yields retreated from their 16-year highs. The yen, typically responsive to yield movements, was trading at 148.39 per dollar, marking a 0.5 percent increase. Earlier this week, it reached its lowest point since October 2022, touching 150.165.
Despite the recovery in bond markets, analysts have warned that the sharp moves of recent days may inflict damage on parts of the financial system.
“There’s an element here of just taking stock ahead of what should be a very important data release,” said Rodrigo Catril, senior FX strategist at National Australia Bank, as quoted by Reuters.
“We’ve got to be mindful that at the moment, U.S. Treasury yields and the dollar, in particular, have been very reactive to positive data releases coming from the U.S. and therefore there’s potential for fireworks tonight.”
Key factor in Fed’s decision
The job report will be a key factor in the Fed’s decision on whether to raise interest rates again next month. Strong job growth could mean that the Fed would continue to raise rates. However, if the report shows that job growth is slowing down, it could mean that the Fed will be more cautious about raising rates.
“We think the market is taking a breather ahead nonfarm payrolls and other labor-market data releases tomorrow,” said Catril.
Economists predict that the U.S. job growth will be slowing to 170,000 in September, down from 187,000 in August. Meanwhile, the unemployment rate is expected to decline from 3.8 percent to 3.7 percent.
Recent data also revealed that U.S. private payrolls had grown below expectations the previous month. Private sector employers were hiring at the slowest pace in over two and a half years.
This situation could pull down Treasury yields and limit further dollar gains as signs of slowing economic growth become more evident.
While analysts say more data are needed to assess the pace of the U.S. labor market’s cooling, money markets predict an 80 percent chance that the Fed will keep its benchmark overnight rate steady. This is up from 55 percent a month ago.
Investors are now forecasting two or three interest rate cuts from the Fed by the end of next year, down from four or five cuts in early September.
Gold investors cautious
Meanwhile, gold prices are currently in a consolidation phase, with investors adopting a cautious stance ahead of the data release. The market is closely monitoring for the next potential direction of gold.
Despite a recent decline and a break below previous support, the MACD shows weakening bearish momentum. Its RSI was at 30, indicating that gold might soon be considered oversold.
FX Street recorded the resistance levels for gold at $1,835 and $1,860, while the support levels were at $1,810.00 and $1,785.