US Dollar, Japanese Yen Ease Lower - US NFPs Could Determine Risk Trends on Friday

The US dollar and Japanese yen both fell against most of the majors on Thursday as risk sentiment improved, albeit very slightly. Indeed, US equities ended the day higher, as the S&P 500 gained 11 points to 842.46 and the DJIA rose by 75 points to 8750.24. While the DJIA closed above the 200 SMA, we can’t really call it a “breakout” unless the index continues to make headway on Friday. Whether this will happen may have a lot to do with the headline event risk for the US dollar: non-farm payrolls (NFPs). Based on both a Bloomberg News poll of economists and a variety of leading indicators, Friday’s release of the NFP report is likely to show job losses for the seventeenth straight month in May, but the rate of decline is anticipated to slow. At the time of writing, Bloomberg News was calling for NFPs to plunge by 520,000, but looking at the range of estimates, economists are anticipating that NFPs could fall anywhere between 450,000 and 600,000. Based on the improvements we’ve seen in leading indicators like initial jobless claims, consumer confidence, and the employment components of ISM non-manufacturing, we expect that NFPs may drop somewhere in the range of 500,000 to 540,000.

We’ve seen that risk trends are still the primary driver of price action, as the US dollar tends to fall when investor sentiment builds and usually rallies amidst market-wide risk aversion. Thus, it will be necessary to keep this correlation in mind when trading around the time of the release of NFPs. From a technical perspective, the daily chart of the US dollar index shows that the currency bounced on Wednesday from key support at the 61.8 percent fib of 71.32-89.62 at 78.29, but on Thursday, price subsequently backed off from former support at 79.80 (the May 22, 25 lows). These two levels - 78.29 and 79.80 - will essentially become “lines in the sand” on Friday. Indeed, daily RSI for the index rose from overbought levels on Thursday, but we also saw this occur last week, suggesting this is a weak bullish signal.

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