Dollar forecast: US Dollar Index (DXY) off highs on firmer risk appetite

The US dollar index was still higher on the session at the time of writing, but it was coming off its best levels as the EUR/USD and GBP/USD started to join other major pairs in rebounding off their lows. The USD/JPY was also adding pressure, with the yen rising on the back of increasing expectations that the Bank of Japan will further tighten its monetary policy. FX investors are looking forward to the release of US nonfarm payrolls report, due tomorrow, which should impact the near-term dollar forecast.

Risk on trade weighs on US dollar

The markets remain firmly in a risk-on mode, with major global indices rallying. In Europe, the German DAX, the UK’s FTSE, and several other indices surged to record highs. Interestingly, the FTSE outperformed, largely due to weaker-than-expected UK economic data, which increased expectations for further rate cuts from the Bank of England. While the BoE cut rates as anticipated, a surprise move by two MPC members voting for a larger 50-basis-point cut caught the market off guard, sending the pound tumbling and lifting the FTSE higher.

Across the Atlantic, U.S. unemployment claims came in slightly higher than expected, leading to a modest pullback in the dollar, particularly with the non-farm payrolls report looming tomorrow. With risk appetite holding firm, we have seen a resurgence in higher-yielding currencies like the Australian dollar, after starting the session lower.

Forex Market Overview

In other currency markets, several key developments are unfolding:

• GBP/USD: The pound took a knock earlier, following the BoE’s dovish shift. The additional votes for a 50bp rate cut rattled traders, and as a result, sterling slipped. With further monetary easing now firmly on the table, the downside risks remain for GBP, particularly if upcoming data continues to paint a weaker economic picture. But for now, the GBP/USD has come off its lows thanks to ongoing risk-on trade, which is hurting the dollar across the board.

   

• USD/CAD: This pair has taken out key support levels around 1.4370-1.4400, following a decisive trendline break on the back of Trump’s decision to delay tarrifs. A more sustained move lower—especially below 1.4261—would confirm a lower low, raising the possibility of a deeper decline towards 1.42 or even 1.40 in the days ahead. The Canadian employment report, due tomorrow, could play a crucial role in setting the tone for this pair.

   

• EUR/USD: The euro has stabilised amid dollar softness, though upside potential remains capped by lingering concerns over the Eurozone’s growth outlook. Tomorrow’s U.S. jobs report will be key—should the data disappoint, we could see renewed strength in the euro, but a robust report would likely reinforce the dollar’s dominance.

   

• AUD/USD: The Aussie dollar has been on the front foot in recent days, showing promising signs of a potential bottom following Monday’s hammer candle formation. That said, a true recovery scenario hinges on whether the pair can break above the 0.6335 level, which could pave the way for a move towards 0.64 or even 0.65, depending on tomorrow’s U.S. jobs figures.

Dollar forecast: NFP Key Event to Watch

The U.S. non-farm payrolls report is scheduled for 1:30 PM London time tomorrow. Markets are expecting a headline figure of 169,000, a notable drop from the previous 256,000. Meanwhile, average hourly earnings are expected to hold steady at 0.3% month-on-month. Adding to the mix, Canada’s employment report is due at the same time, making it a pivotal moment for USD/CAD traders.

Source: TradingView.com

For the Dollar Index itself, key support is seen between 107.08 to 107.35, while resistance is located between 108.00 to 108.34 region. A move outside of these ranges should lead to a continuation in the direction of the break.

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R

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