Dollar eyes gains as jobs data could force rethink of game of chicken against fed

By Yasin Ebrahim 

Investing.com -- The dollar swung higher Thursday, just a day ahead of Friday’s labor market report that some believe could force investors to rethink their game of chicken against the Federal Reserve and potentially thrust the greenback to glory.

The U.S. dollar index, which measures the greenback against a trade-weighted basket of six major currencies, rose by 0.85% to 104.91.

Investors have largely been ignoring the Fed’s pledge to keep rates higher to cool inflation, but the December jobs report “might well be a possible candidate, which might convince the market to question its divergence with the Fed expectations once again,” Commerzbank said in a note.

The December jobs report due Friday is expected to show that the economy created about 200,000 jobs last month and the unemployment rate remained steady at 3.7%. Wage growth will likely dominate attention and is expected to slow to 0.4% for the month and 5% on an annualized basis from 0.6% and 5.1%, respectively.

The Fed has said that it does not expect to cut rates this year. But the market does not trust this view, according to commerzbank, and this remains "the central aspect dominating the dollar outlook"

This divergence, however, isn’t likely to end in a victory for those engaged in a game of chicken against the Fed, potentially paving the way for the greenback to rack up gains.  

As long as this divergence persists, the “higher the risk that the sentiment on the currency market will tilt in the direction of Fed expectations after all and that the dollar will appreciate significantly once again,” Commerzbank added.

The slew of reports on the labor market this week - showing demand remains strong and fewer initial jobless claims - have already delivered the first blow and shown a chink in the armor of those harboring ‘Fed pivot’ hopes.

Investors are now pricing in a peak Fed funds rate of 5.06%, higher than the 4.94% level seen the start of the week, according to Investing.com’s Fed Rate Monitor Tool.

Others, however, believe the greenback’s road ahead will likely be choppy as the world's reserve currency is fast approaching technical headwinds.

“We believe the currency will remain range-bound / choppy in sessions ahead- as the dollar is fast approaching its 200-day MA and declining 50-day MA as chart resistance,” Janney Montgomery Scott said in a note.