US Dollar Forecast: USD Rally to Persist on Upbeat US NFP Report

US Dollar Talking Points

The US Dollar Index (DXY) climbed to a fresh yearly high (97.74) as heightening Russia-Ukraine tensions appear to be spurring a flight to safety, and fresh data prints coming out of the US may keep the Greenback afloat as the Non-Farm Payrolls (NFP) report is anticipated to show a further improvement in the labor market.

Fundamental Forecast for US Dollar: Bullish

The US Dollar Index (DXY) has broken out of a narrow range as the threat of war in Europe drags on investor confidence, and swings in risk appetite may continue to sway the Greenback as the US and its allies implement additional sanctions on Russia.

At the same time, the update to the US Non-Farm Payrolls (NFP) report may influence the near-term outlook for the Dollar as the economy is anticipated to add 438K jobs in February, and another uptick in employment may generate a bullish reaction in the Greenback as the development puts pressure on the Federal Reserve to normalize monetary policy sooner rather than later.

In turn, the DXY may resume the bullish trend carried over from the previous year as the Federal Open Market Committee (FOMC) prepares to switch gears, and it remains to be seen if the central bank will adjust its exit strategy as Chairman Jerome Powell and Co. are slated to release the updated Summary of Economic Projections (SEP) at the next interest rate decision on March 16.

Until then, fresh data prints coming out of the US may sway the Dollar as Fed Governor Christopher Waller emphasizes that “the Fed needs to act promptly to begin tightening monetary policy,” and a further improvement in the labor market may push the FOMC to projected a steeper path for the Fed Funds rate as the official acknowledges that “a strong case can be made for a 50-basis-point hike in March” while speaking at an event held at the University of California.

With that said, a further deterioration in risk appetite may keep the US Dollar Index (DXY) afloat over the coming days, and another uptick in employment may push the Greenback to fresh yearly highs as it puts pressure on the FOMC to adjust its exit strategy.

— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong