UBS Cautious About Pursuing Dollar Weakness Ahead of Payrolls

The price of Brent crude surged, while equity markets faced declines following the Iranian missile strikes on Israel. However, gains for the US dollar were relatively modest, indicating that the market does not appear to be heavily positioned for short dollar trades, according to analysts at UBS.

As of 05:20 ET, the Dollar Index, which measures the greenback against a basket of six currencies, recorded a 0.1% increase, trading at 101.020 after a 0.5% rise in the previous session.

Data released on Tuesday revealed disappointing September manufacturing figures, overshadowing an unexpected rise in August job openings, which caused a decline in two-year US Treasury yields.

UBS analysts pointed out that this aligns with their view that the market tends to react more strongly to weak US data compared to resilient figures, attributing greater forward-looking value to the former. They highlighted that the weaknesses in the prices paid and employment components particularly support potential Federal Reserve rate cuts.

The lackluster data arrived at a strategic moment for those betting against the dollar. Recent remarks from Fed Chair Jerome Powell indicated that future rate cuts would revert to 25 basis point increments starting in November, prompting a slight pullback in the dollar after significant losses since mid-August, UBS noted.

Additionally, comments from Fed officials, such as Bostic, indicated that more substantial cuts could occur if the jobs market showed real signs of weakness, suggesting that Powell’s comments may not have a lasting impact.

Attention now turns to the employment data set to be released on Friday. UBS economists predict that headline employment numbers will rebound to 180,000, surpassing market expectations of 150,000, while the unemployment rate is expected to remain at 4.2%. These outcomes would support a 25 basis point rate cut at the upcoming FOMC meeting on November 7, rather than a more aggressive 50 basis point cut.

UBS also mentioned that given the current closeness of market conditions to their year-end forecasts, it is becoming increasingly difficult to pursue general dollar weakness unless there is a strong conviction that Friday’s jobs data will fall short, such as payrolls below 100,000 without upward revisions or an unemployment rate of 4.4% or higher.