The G10 FX space has been moving in near lockstep with pricing, leaving US labour market data as the decisive driver for the . With a topping pattern emerging on the DXY daily chart, Friday’s looms large in determining whether US dollar gains can extend.
- G10 FX moves are tightly tied to Fed cut pricing
- Payrolls, , eyed for volatility risk
- Hiring slowdown may prove supply-driven
- DXY topping pattern tilts near-term risks lower
USD Outlook Summary
Be it high-yielding or a funding name, safe haven or commodity play, the G10 FX universe has been beholden to Fed rate cut expectations over the past fortnight, putting emphasis on U.S. labour market data given that’s what Federal Reserve officials are watching when evaluating when and by how much interest rates need to be lowered further.
After two weak payrolls reports in July and August, traders may well anticipate a continuation of that trend when the September report is released on Friday, creating an environment where further gains in the greenback may be hard won. With a notable topping pattern on the US dollar index daily chart on Friday, weakness may even eventuate in the days ahead.
G10 FX Tethered to Fed Pricing
Based on the strength of correlations against market pricing for Fed rate cuts out to the end of September next year over the past fortnight, you could argue that little else has mattered for the G10 FX universe recently. The correlation coefficients below underline that point, with scores of +/-0.88 or more with (yellow), (blue), (grey), (purple), (red) and (black).
These readings are strong and significant, signalling that over the past two weeks, the US dollar has moved in near lockstep with rate cut pricing. As it swelled, the US dollar deflated. As it unwound, the US dollar popped.
Source: TradingView
Labour data key for Federal Reserve
Even though most US economic data have topped expectations recently, including incomes and spending last Friday, Federal Reserve officials have indicated that labour market outcomes will have a large sway on how monetary policy will be set in the future.
The general message, including from Jerome Powell, is that until there’s evidence that labour market conditions are no longer softening, it allows policymakers to look through the recent uptick in inflationary pressures.
Source: TradingView
Whether you agree with the approach or not, the Fed’s reaction function appears to be almost entirely driven by just its full employment mandate, especially hiring data. That means not only Friday’s payrolls report could be a major source of volatility, but also Wednesday’s ADP national employment report which, once the government figures have been revised, has been a decent lead indicator on hiring trends within the U.S. private sector.
Other reports that could shed light on whether the recent slowdown in hiring is due to weaker demand or reduced supply of labour—such as JOLTS, Challenger layoffs, and jobless claims—could also spark meaningful bouts of volatility should they print well away from consensus.
Given recent strong economic outcomes, led by the household sector, my sense is the hiring slowdown is more due to seasonal quirks and reduced supply from the Trump administration’s immigration crackdown, increasing the risk that labour market outcomes may eventually restrengthen, repeating what was seen in 2024.
That ended with a large hawkish recalibration of rate cut pricing and sent the US dollar sharply higher. However, until the labour market data begins to match the strength seen in other indicators, it will allow traders to continue leaning into US dollar strength on the proviso large scale rate cuts from the Fed are coming.
DXY Technical Analysis
Source: TradingView
That may well play out again in the lead-up to Friday’s payrolls report, a view bolstered by the dark cloud candlestick pattern completed on the US dollar index (DXY) daily chart on Friday. The topping pattern, after the price rebound stalled at known resistance at 98.60 a day earlier, tilts near-term risks for the DXY lower.
On the downside, the confluence of the 50DMA, minor support at 98.08 and September uptrend around 98.00 looms as important, providing a platform to set longs above or ceiling to establish shorts below depending on how the near-term price action evolves.
If downside were to play out, a move beneath the support zone would put a retest of support from 96.40 on the table with little meaningful levels found in between. But if the zone holds firm, bulls would likely eye a clean break above resistance at 98.60, a level the DXY has been unable to overcome since early August. A break and close above 98.60 would improve the prospects for a run towards resistance at 100.25.
Momentum indicators are providing a neutral signal, with RSI (14) trending higher above 50 while MACD has already crossed over from below but remains in negative territory. Rather than holding a specific directional bias, the message is one where price action and signals should take precedence when assessing potential setups.