Dollar riding high into NFP and a day of more conflict

Overnight Headlines

*Ukraine blames Russia for attack on Europe’s largest nuclear power plant

*China likely to set lowest GDP target since 1990s at key meeting

*Euro tumbles, gold steady after news of fire at Ukrainian nuclear plant

*Oil falls from spike highs on rumours that Iran nuclear deal is close

US equities topsy-turvy journey continued with indices closing lower on Thursday. Cyclical, growth stocks and small caps were hit the most with the Nasdaq lower by 1.6% while the Russell 2000 dropped by 1.3%. The Dow and the S&P500 closed lower by 0.3% and 0.5%. Uncertainty over the attack on Europe’s largest nuclear power plant is pushing Asian markets down. Futures too, are heavily in the red lower by 1-2%.

USD was stronger again yesterday against most of its peers, except AUD and NZD. This buying has continued today with DXY above 98. EUR has traded to a new low at 1.1009 this morning. EUR/GBP is also pushing to new cycle lows at 0.8263. GBP closed weaker but remains in the 1.33-1.34 range. AUD is enjoying its fifth gain in the last six days advancing above the 200-day SMA which becomes support at 0.7322.

Market Thoughts – NFP sideshow amid commodity surge

The fire at the nuclear plant in Ukraine has grabbed the overnight headlines. But as we have been writing all week, it is commodities which continue to go ever higher. Global prices are on track for the biggest weekly rally in more than five decades. Moody’s has warned that rising commodity costs will tighten financial conditions and weaken growth for major importers. The brunt of the impact will fall on China, India and Japan.

The monthly US jobs report is released today which may not get all the attention it normally garners. Probably more important in the current climate will be next week’s US CPI data. Consensus sees 400k job gains with a potentially sharp drop in the unemployment rate. Fed Chair Powell again signalled a 25bp rate hike at the next FOMC meeting. But he raised the prospect of a bigger hike at a later stage.

Chart of the Day – DXY breakout to new cycle highs

It’s taken a Russian offensive to push investors towards the safe haven status of the dollar and new cycle highs. Rates markets have been volatile this week too. But Fed Chair Powell’s testimony restored 20bp to the expected Fed tightening cycle, after the midweek one-day crash in rates.

A solid jobs report should keep a hawkish Fed and the dollar reasonably well supported. The DXY had been trading above the November high at 96.93 but had struggled to close decisively above here. Initial support comes in at the Fib level of the March 2020 to January 2021 move at 97.72 and last week’s high at 97.73. Targets above include 98.37 and 99.66.

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