US Dollar come back from the dead ahead of US NFP

The US Dollar on Friday was perking back to life following a sharp fall to fresh cycle lows on the back of the Federal Reserve chairman Jerome Powell's mixed speech, whereby markets ran with the most optimistic of the comments. Markets have preferred to focus on the prospects of continued disinflationary outcomes in the world's largest economy and Powell gave the bulls a gift when he said that, ''the disinflationary process has started''. 

However, markets took a dovish cue from policymakers at the European Central Bank and the Bank of England, who said inflationary pressures in their economies have become more manageable. The ECB raised key rates 50bp taking the MRO to 3.0%, and indicated it expects a repeat in March. Thereafter, any further hikes will be data-dependent the central bank said. Given the stretch positioning, however, the euro needed more from the event to stay up. ''EUR long positioning sits near the top of our tracking indicator, leaving it vulnerable to lofty market expectations,'' analysts at TD Securities said.

Against a basket of currencies, the US Dollar index, DXY,  rose to 101.90, away from Wednesday's nine-month low of 100.80 ahead of Friday's key Nonfarm Payrolls.  Analysts at ANZ Bank explained that markets are clearly in no mood to embrace any hawkishness, ''and that could be a real limiting factor for the USD.'' 

Friday's Nonfarm Payrolls event will be a critical component of the US interest rate outlook and will drive sentiment in this regard. Analysts at TD Securities are projecting payroll gains to have stayed largely unchanged vs December, posting a still solid 220k increase in January. ''Both the Unemployment Rate and average hourly earnings should have remained steady: the former at a decades-low 3.5%, and the latter printing a 0.3% MoM gain,'' the analysts explained. ''Note that the January jobs report will also include important revisions to the establishment survey data for 2022,'' they added.