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• The US dollar index has retreated after the tariff threat waned.
• The BLS will publish the latest nonfarm payroll data on Friday.
• The Fed is now focusing mostly on inflation that has failed to move to 2%.

The US dollar index retreated this week as the recent tariff fears waned. The DXY index dropped to a low of $107.75, down by 2.20% from its highest point this year as focus shifted to the upcoming non-farm payroll (NFP) data. So, is the US dollar index a good asset to buy today?
 

US nonfarm payroll data ahead

The US dollar index pulled back this week after Donald Trump dialed back his tariff talk. He paused tariffs on Mexican and Canadian goods and hinted that he was open to negotiate with China, the second-biggest trading partner. 

The DXY index cooled after a report showed that the number of job vacancies in the US cooled in December. They fell by 556,000 to 7.6 million, lower than the median estimate of 8.2 million.

Another report by ADP showed that the private sector created 186k jobs in January, higher than the 140k it added a month earlier.

The main economic data to watch this week will be the upcoming nonfarm payroll (NFP) data scheduled on Friday.

Economists expect the data to show that the economy added 154k jobs in January after creating 256k jobs a month earlier. The unemployment rate is expected to remain 4.1%, while wage growth is expected to have remained a 3.9%.

The nonfarm payroll jobs numbers are important for the US dollar because they affect the Federal Reserve interest rates trajectory. They are part of the Fed’s dual mandate, with the other part being on inflation. 
 

Fed is focusing on inflation

However, this week’s NFP report will likely have a muted impact on the US dollar index because the Fed is not putting a lot of emphasis on the labor market. Instead, it is focusing on inflation, which has remained steady in the past few months. 

The Federal Reserve believes that the labor market is strong even as the unemployment rate has remained above 4% for months. In an emailed statement to Invezz, Tod Jankins, an analyst at PIMCO said:

“We expect the jobs numbers to have an immaterial impact on the US dollar and equities. Nonetheless, a sharp deterioration may be a wakeup for the Fed and push officials to recalibrate their policies.”

The US will publish the January inflation data next week. Analysts expect the headline Consumer Price Index (CPI) to move from 2.9% in December to 3.0% in January, driven by the recent wildfires in California and their impact on housing and insurance. 

The DXY index will react to the upcoming Bank of England (BoE) interest rate decision. Analysts expect the bank to start cutting interest rates by 0.25% and deliver a dovish tone. The BoE’s actions are important because sterling is a key part of the US dollar index.
 

US dollar index technical analysis

(Click on image to enlarge)

DXY chart by TradingView

The daily chart shows that the DXY index peaked at $110.15 earlier this year as hopes of a more hawkish Fed remained. It has now pulled back and hovering at $108, the 23.6% Fibonacci Retracement point. 

The pair has also remained slightly above the 50-day moving average, a sign that bulls are still in control for now. It has also remained above the key support at $106.50, the highest swing in April 2024. 

Therefore, the DXY index will remain in an upward trajectory as long as it is above the 50-day moving average. Such a move will see it retest the year-to-date high of $110. A drop below that moving average will see it drop to the 50% retracement point at $105.

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