Dollar invincible? Forecast as of 02.09.2022

Investors are looking forward to the jobs report. Both good and bad news could weaken the S&P 500 and EURUSD. The Fed could sacrifice economic expansion to curb inflation, which worries investors. Let us discuss the Forex outlook and make up a trading plan.

Fundamental US dollar forecast today

Don’t go against the Fed, that is the rule. Anyone breaking this rule will fail. For example, the US stock indexes crashed to a five-week low following the rise on the expectations of the Fed’s dovish shift. 10-year Treasury yield, following a massive sell-off of the bonds, has been up to the highest level over the past 2.5 months. Furthermore, the euro, which was about to rally amid lower gas prices, has been down amid strong US domestic data. The US economy remains strong, and the Fed can safely hike the rates. This is a bearish driver for the EURUSD.

A decrease in jobless claims proves the US labour market to be strong. The better-than-expected PMI data reported by the ISM mean the US economy is not threatened by recession. The Fed could continue the current policy and bring the interest rates to 3.5%-4%, and then keep them at a high level for a long time. If so, the Treasury yield and the US dollar will strengthen. Furthermore, a weak US jobs report may not weaken the dollar.

Bloomberg forecasts that unemployment will remain at 3.5%, and non-farm payrolls will increase by 300,000. Such figures will allow the Fed to raise the federal funds rate by 75 basis points in September, the likelihood of which CME derivatives estimate at 74%.

A stronger-than-expected report will send the Treasury yield up and strengthen the US dollar, as investors will be reassured that the US economy is far from recession. If so, the Fed will safely continue monetary tightening. Therefore, good news will be positive for the greenback. What about bad?

Ahead of the 2008-2009 recession, the negative economic reports were generally interpreted as positive for stocks and put pressure on the dollar amid the expectations of a slowdown in the monetary restriction cycle. This link may not work now. In Jackson Hole, Jerome Powell made it clear that the US central bank would sacrifice both economic expansion and employment growth to press down inflation. The US jobs report should be really far below the forecast to weaken the greenback. A modest deviation from the expected employment growth rate is likely to support the dollar.

This scenario is proven by the ADP private sector jobs report. A weaker-than-expected report didn’t discourage the S&P 500 and the EURUSD bears.

EURUSD trading plan today

So, investors expect the US dollar to strengthen in case of a strong US jobs report or a slightly negative one. This could result in the failure of the EURUSD bears. When everyone sells, there is a good chance to buy. I suggest entering EURUSD longs if the price slightly declines on the US jobs report publication.

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