Trade of the Week: USDInd seeks fresh directional catalyst

• USDInd ends May ↓1.7%

• ECB meeting & NFP in focus

• Over past year ECB triggered moves of 0.6% ↑ or ↓

• Trapped in D1 range since mid-May  

• Technical levels – 105.20 and 104.20

After bouncing within a 1000-point range since mid-May, FXTM’s USDInd is on breakout watch!

A high-risk cocktail featuring the European Central Bank (ECB) and US jobs report could rock the index this week. 

Note: FXTM’s USDInd tracks the US Dollar Index.  This measures how the dollar performs against a basket of six different G10 currencies, including the Euro, British Pound, Japanese Yen, and Canadian dollar.

Interestingly, the dollar depreciated against every single G10 currency in May.

Three heavy-hitting events in May knocked the dollar.

Starting from the dovish Fed meeting, soft US April jobs report, and cooler-than-expected CPI print. Last Friday, the Fed’s preferred inflation gauge – core PCE also printed below market forecasts, keeping the doors open for lower interest rates in 2024.

With all the above said, here are 3 reasons why the USDInd could see significant moves this week:

    1) ECB rate decision

The ECB is widely expected to cut interest rates by 25 basis points at its meeting on Thursday, June 6th.

So, the focus will be on the press conference for fresh insight into what to expect in H2, especially after Germany and Eurozone inflation edged up in May.

Note: The Euro accounts for almost 60% of the US Dollar Index weighting. A weaker euro tends to push the index higher and vice versa.

As of writing, traders are pricing in a 90% probability of a second 25-basis point cut by October with the odds of a third cut by the end of 2024 around 40%.

• The USDInd could push higher if the ECB strikes a dovish tone, and signals further cuts down the road.

• Should the central bank sound more hawkish and signal a “one and done” rate cut for 2024, this may send the USDInd lower.

Fun fact: Over the past 12 months, the ECB rate decision has sparked upside moves as much as 0.6% or declines of 0.6% in the 6 hours post-release.

    2) US May NFP report

This major economic release is likely to influence expectations around when the Fed cuts rates in 2024.

Markets expect the US economy to have created 190k jobs in May, compared to the 175k in the previous month while the unemployment rate is expected to remain steady at 3.9%.

Traders are currently pricing in a 60% probability of a 25-basis point cut by September with this jumping to over 90% by November.

• A soft jobs report that boosts Fed cut bets may send the USDInd lower.

• If the jobs data prints above market forecasts, this may push the USDInd higher.

Fun fact: Over the past 12 months, the US jobs report has trigged up moves as much as 0.4% or declines of 0.6% in the 6 hours after release.

    3) Technical forces

Prices remain in a range on the daily charts with support at 104.20 and resistance at 105.20.  

• A sold breakout above 105.20 may signal a move towards 105.60.

• Should prices slip below 104.20, bears may be encouraged to target 103.90.