During Friday's Asian trading session, the dollar index attracted follow-through buying interest, continuing to recover from the late-September low set on Thursday, with prices climbing into the 101.80 region.
Despite this rebound, the index remains slightly lower on a weekly basis, with traders staying cautious and waiting for the highly anticipated U.S. nonfarm payrolls report to provide fresh directional cues.
Market consensus expects October nonfarm payrolls to show a gain of 65,000 jobs, up from the prior reading of 29,000, while the unemployment rate is projected to hold steady at 4.2%.
Average hourly earnings stand out as the key focal point of this release, as the strength or weakness of wage inflation will directly reshape Federal Reserve policy expectations and, in turn, influence the degree of dollar buying pressure.
Overnight, crude oil prices staged a sharp rebound, reigniting inflation concerns.
Markets continue to price in a nearly 70% probability of a Fed rate hike in December, which has helped Treasury yields edge higher from the mid-week low triggered by the midterm elections, lending support to the dollar index.
Geopolitical uncertainty in the Middle East has also provided an additional tailwind for the safe-haven dollar.
On Thursday, Trump suggested the U.S. might need to take further action against Iran, with Washington and Tehran deeply divided over nuclear issues and navigation rights through the Strait of Hormuz.
However, Senate Democratic leader Schumer publicly called for efforts to bring the Iran conflict to an end.
With conflicting signals in play, it is premature to confirm that the dollar index has established a short-term bottom until sustained and strong buying interest emerges.
On the 1-hour timeframe, the dollar index is holding above the 100-hour exponential moving average at 101.62, maintaining a mildly bullish short-term tone.
Price has already reclaimed the 38.2% Fibonacci retracement level at 101.69, which has now turned into support.
To the upside, the first resistance sits at the 50% Fibonacci retracement of 101.84, followed by the 61.8% retracement at 101.99, the 78.6% retracement at 102.21, with a further target pointing to the recent cycle high of 102.49.
On the downside, the immediate support is the reclaimed 38.2% retracement at 101.69, closely followed by the 100-hour EMA at 101.62.
Deeper support lies at the 23.6% Fibonacci level of 101.50, with the critical structural bottom at 101.20.
Should price fall back below 101.20, this recovery phase would be deemed a failure, and sellers would once again take control of the market.
On the 4-hour chart, prices have stabilized and rebounded from lows, with indicators shifting from weak to strong, though the downward pressure from the prior decline has not been fully shaken off.
Whether the rebound can extend further will largely depend on the outcome of the nonfarm payrolls data.
Editor's Summary
The dollar index is undergoing a technical recovery ahead of the nonfarm payrolls release, supported by rising Treasury yields and geopolitical safe-haven flows, while Democratic efforts to end the conflict are capping upside potential, leaving the market in a tug-of-war between bulls and bears.
The near-term risk is that nonfarm payrolls and wage data come in significantly below expectations, sending the dollar back down to test the 101.20 low.
The potential opportunity is that employment data beats expectations, pushing the dollar index toward resistance around 102.21.
Key focus should be on a breakout of the 101.62 to 101.84 range, as volatility will likely expand notably during the nonfarm payrolls release, with waiting for the data to land being the primary approach.
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