The U.S. dollar will be expected to remain weak, but will it be limited?

The U.S. dollar weakened sharply after the dismal labour market report.  The currency posted its biggest single-day drop since 15 June 2023, after signs of a less resilient U.S. labour market reduced the outlook for how long the Federal Reserve will keep interest rates higher, while the yen surged on concerns the 10-year Treasury’s yield rose above 4%.

Nonfarm Payrolls rose by 209,000 in June, falling short of forecasts for the first time in 15 months, according to data released on Friday. After the strong ADP report that was made public on Wednesday, another pleasant surprise was anticipated.

Despite slowing down, the positive signs from the labour market led the market to expect that the Federal Reserve (Fed) will hike its interest rate by 25 basis points at the July meeting.

The focus will turn next week to US inflation numbers following the labour market data. The numbers are scheduled to be released on Wednesday.

The numbers will impact Fed rate hike expectations. Further, the Producer Price Index (PPI) also will have to be closely watched. The monthly CPI is anticipated to increase by 0.3%, the annual rate to decrease from 4.0% to 3.1%, and the Core CPI to decrease from 5.3% to 5.0%.

Technical Outlook

Last week, the dollar index witnessed a more than 0.60% fall. It retreated from the high of 103.5720 and dropped to 102.226 and settled at 102.2660.

Since 28 November 2022, it has been trading in a symmetrical triangle pattern, where it’s forming lower high and higher low. This pattern indicates an ongoing period of price consolidation before the prices break out.

On the downside, immediate support is seen at 101.90 and a break below will add pressure and the dollar index may drop towards 101.65-101.20-100.85 levels.

On the upside, massive resistance is seen at 103.6550 above next resistance will be 104.45.

A near-future trend may remain in the consolidation zone unless it gives a break below the crucial support of 100.85 and a break above 104.45.

Furthermore, the recent unemployment data has calmed the rate hike expectation, this may hold downside pressure for some time.