TD Securities analysts highlight that the US Dollar Index (DXY) has exhibited rangebound behavior with low volatility since early April, consistently closing on a 98-handle every day since April 8, 2024 [1]. The analysts argue that the US Dollar faces asymmetric downside risk ahead of the April US payrolls release, as market participants already anticipate some improvement in employment data based on high-frequency indicators such as weekly ADP and continuing claims [1].
Despite the upcoming payrolls report, TD Securities notes that the Federal Reserve's policy stance is now more influenced by inflation dynamics—particularly the potential pass-through of the Q1 energy shock to core inflation—rather than labor market conditions [1]. With Fed rate cuts largely priced out, the analysts believe that even a positive employment data surprise is unlikely to drive the US Dollar significantly higher, as the focus has shifted to next week's CPI data, which is expected to have a greater impact on Fed expectations and USD sentiment [1].
The extent of any near-term downside for the US Dollar will also depend on developments in the Middle East, according to TD Securities [1]. Overall, the analysts suggest that the risk for the US Dollar is skewed to the downside heading into the payrolls release, with limited upside potential even in the event of strong jobs data [1].
CONCLUSION
TD Securities sees limited upside for the US Dollar ahead of the April payrolls, citing that inflation data and geopolitical developments are now more influential for Fed policy and USD direction. Market participants should watch next week's CPI release for a clearer signal on the Fed's stance and potential USD moves.