MUFG’s Derek Halpenny notes the US Dollar (USD) is trading near the top of its recent range as markets await key United States (US) labour data, with EUR/USD seen vulnerable to a stronger Nonfarm Payrolls (NFP) report. Stable US employment and broadening inflation pressures could keep Federal Reserve tightening risks alive, while geopolitical tensions and potential Oil price spikes further skew Dollar risks to the upside.

Dollar supported by labour and geopolitics

"The US dollar remains closer to the top end of the recent trading range after on Wednesday hitting the highest level (DXY basis) since the ceasefire deal was announced on 8th April."

"While we await whether there is any meaningful development in negotiations, the focus will shift to the key economic data point of the week – the nonfarm payrolls report. The data this week is part of the reason why the dollar is at the higher end of recent trading ranges with labour market data, in particular, not showing much evidence of deterioration."

"With rate spreads more influential once again in driving FX, EUR/USD is now more vulnerable to a stronger employment print given the OIS curve in Europe is now well priced or even overpriced for what the ECB will deliver. The 2-year UST bond yield is up 21bps since the beginning of May while the equivalent yield in Germany is just 2bps higher."

"A consensus print today (+88k NFP; 4.3% unemployment rate) will be enough to keep the US dollar well supported and primed for an extension stronger if we do not get progress over the short-term in the Middle East."

"But risks today are two-way and given consumer sentiment is weak and confidence in labour markets are mixed a weak print could see a lot of the tightening priced in the curve evaporate quickly. It is notable that the household survey shows a much weaker employment backdrop."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)