US dollar rallies to fresh bull cycle highs on market pivot

The US dollar rallied on Thursdays as bulls picked up the currency at a discount figuring the risks associated with global stagflation and ongoing geopolitical tensions will keep the US dollar in favour. At 103.549, the DXY index is 1% higher ahead of the Tokyo open, a touch lower than the overnight bull cycle high of 103.942. 

The initial move was illustrated as a prospective scenario in the prior day's post-Fed-analysis here: US dollar and yields sinking as Powell dials down market expectations of 75bp move. More on this below. 

Meanwhile, global growth fears mount following a series of worrisome economic data and ongoing geopolitical risks. The Chinese PMIs remain in contraction territory and the COVID lockdowns are disrupting supply chains. Contagion of the Ukraine crisis in the commodity markets has left a dark cloud over global growth prospects and is subsequently damaging high beta currencies and the euro.  

Then, the nail in the coffin came as the  Bank of England warned of stagflation and weak German data that was showing that industrial orders in March suffered their biggest monthly drop since last October sent the euro below 1.05 the figure.

The greenback was subsequently boosted by safe-haven buying as global equities come back under pressure. The S&P 500 was down 3.6% and the Euro Stoxx 50 fell 0.8%. The yield on the US 10-year Treasury note surged, rising 9.8bps to 3.03% which also helped to propel the US dollar higher ahead of today's critical Nonfarm Payrolls. 

NFP could be the clincher for US dollar bulls 

The Nonfarm Payrolls is a major risk and could well set the tone for the following weeks ahead of the next Fed rate decision. 

''A strong payrolls report could perversely push the market to price in more tightening as the Fed reduced its optionality at its most recent meeting,'' analysts at TD Securities said. 

''That leaves a resilient USD vs EUR and yen very much the path of least resistance. A softer wages print should help to temporarily take the edge off but this will be short-lived until evidence of a peak/moderation in CPI emerges.''

Meanwhile, analysts at ANZ Bank explained, ''whilst the Fed is not currently considering a 75bps rate increase, that guidance is based on expectations that the trend increase in monthly Nonfarm payrolls will slow and core inflation is stabilising. But there are no guarantees at all that that will be the case.''

''Demand for labour in the US remains very strong and core services inflation is rising steadily. The April non-farm payroll and employment reports tomorrow night, therefore, carry a lot of significance,'' the analysts added.

DXY technical analysis

However, the bulls are staying the course at the moment and have cleared the resistance as follows:

Should the above price action play out, the inverse head & shoulders would be a bullish factor on the daily chart.