Review: US Dollar Ignores Dovish Fed and Rallies on Upbeat Jobs Data

The US dollar shrugged off the recent dovish rhetoric by Fed officials and rallied to a one-week high in the week to 4 July helped by stronger than expected jobs data that suggested the Fed may be forced to tighten monetary policy sooner than what markets have already priced in.

US policy makers have been sounding dovish of late helping the reversal of the US dollar index (DXY) from a four-month high touched earlier in June that took it to a near two-month low of 79.74 on 1 July.

The USD index is the gauge that measures the greenback's strength against currencies of the six largest trading partners of the US.

Fed Chair Janet Yellen's post-policy press conference on 18 June hinted at the central bank's resistance to hiking interest rates. On 30 June, Fed member Williams said he did not expect a rate hike until late 2015.

In addition to that, the June Chicago Purchasing Managers' Index (PMI) came at 62.6 compared with analysts' expectations of 63.0 and the May reading of 65.5. The 1 July ISM data showed manufacturing PMI for June at 55.3 from 55.4 compared with market consensus of 55.8.

However, the ADP employment data triggered a rebound in the US currency, despite the Fed Chair once again speaking about the challenges associated with using macro policy as a tool to address financial stability risks.

The ADP employment addition came in at 281,000 in June, beating analysts' forecast of 200,000 and the previous month's 179,000.

The dollar index gathered additional momentum with non-farm payrolls too coming way above market expectations. The number of jobs added in June as per the data was 288,000 versus the consensus of 212,000 and compared with the May addition of 224,000.

Also, the unemployment rate fell to a near six-year low of 6.1% when analysts had been expecting an unchanged reading of 6.3%.

At the 3 July high of 80.31, the dollar index was 0.44% stronger than its 1 July low. On 4 July, the US markets were shut on account of the Independence Day holiday and the dollar held near the one-week high touched in the previous day.

Technical Outlook

The rebound has helped the index hit the 50% Fibonacci retracement of the 11 June to 1 July downtrend and it is now holding between the 50% and 38.2% marks.

A clear break above the 50% level will open up the 61.8% level of 80.45 and then the index will aim the 80.65-80.70 region. The next higher level is 89.90, the 11 July high.

On the downside, the index has its first target at 80.0, the 23.6% retracement and then comes the 70.80-79.75 area.

In the bigger picture, if the downtrend since October 2013 were to continue, the index has its next main target at 78.40.

Further south, a break of 77 will open up 75.85, a break which will shift the focus to the very wide downward channel with a likely downside barrier at 71.30.

On the other hand, if the upward trend gains momentum, immediate targets will be 81.50 and 82.70. A break of that will resume the uptrend since early 2012 and open up 84.75, ahead of the channel upside barrier near 86.0.