Dollar Poised for Significant Weekly Gains Ahead of Payroll Data

The U.S. dollar experienced a slight decline on Friday, retreating from a six-week high as investors awaited a crucial jobs report that could influence sentiment ahead of the Federal Reserve’s upcoming meeting.

As of 04:25 ET (08:25 GMT), the Dollar Index, which measures the currency against a basket of six others, fell 0.1% to 101.667, just below the previous session’s six-week peak. The index has risen nearly 1.5% for the week, marking its strongest performance since April.

Payrolls to influence dollar movements

This week, the dollar received support from relatively robust labor data—job openings, private payrolls, and weekly jobless claims—coupled with safe-haven demand amid heightened tensions in the Middle East and their potential impact on the global economy.

Market focus now shifts to the September nonfarm payrolls report, which is expected to shape market expectations regarding future interest rate adjustments by the Federal Reserve. Economists predict that the U.S. economy maintained a moderate pace of employment growth during the last month of the third quarter, forecasting 147,000 new jobs, while the unemployment rate is expected to hold steady at 4.2%.

However, ING is slightly more pessimistic, projecting a payroll increase of 115,000 and an unemployment rate of 4.3%. Analysts from ING noted, “This probably doesn’t alter the Federal Reserve’s outlook, which seems poised for a 25 basis point cut in November, while resisting calls for a more aggressive 50 basis point cut. Nevertheless, some upward adjustments in interest rate expectations have occurred this week, and the dollar may decline in response to a weaker jobs report.”

Euro weakens amid anticipated ECB cuts

In Europe, the euro weakened against the dollar, trading lower at 1.1027 as it has fallen over 1% this week. This decline has been attributed to signs of decreasing inflation in the eurozone, which have overshadowed positive activity data and growth in French industrial production.

With the European Central Bank already cutting interest rates, the typically hawkish policymaker Isabel Schnabel recently adopted a more dovish stance, raising expectations for another rate cut later this month. ING commented, “We maintain a slightly bearish outlook for EUR/USD in the short term, though forecasts of a slight increase in U.S. unemployment may provide some temporary relief today. However, reduced rate differentials, unstable risk sentiment, and a turbulent EU budget season indicate that EUR/USD could remain under pressure. A break below the critical support level of 1.1000 could lead to a swift decline toward 1.09.”

The British pound rose 0.2% to 1.3154, experiencing a slight rebound following a 1% drop on Thursday after Bank of England Governor Andrew Bailey indicated the central bank might implement aggressive rate cuts if inflation pressures were to ease further. Despite recent fluctuations, the pound remains up over 3% this year, fueled by expectations that the Bank of England will maintain higher interest rates longer than the Federal Reserve due to persistent inflation.

Policy uncertainty impacts yen

The yen fell 0.4% to 146.28, having touched a six-week low of 147.25 a day earlier amidst uncertainty regarding the future direction of Bank of Japan monetary policy. Despite today’s minor gains, the yen is on track for a nearly 3% decline this week, spurred by comments from newly appointed Prime Minister Shigeru Ishiba, which heightened expectations for delayed rate hikes in Japan.

The Chinese yuan remained largely unchanged at 7.0185, with Chinese markets closed until Tuesday due to the Golden Week holiday celebrations.