FX.co ★ USD may extend losses next week

The US dollar has been declining all week before the publication of Nonfarm Payrolls. Ahead of the report, the US currency has stabilized. Traders have taken a wait-and-see approach. Is the US currency really getting cheaper solely because of the release of important US jobs data? There is certainly a grain of truth in it. Yet, the main reason is low demand.

According to Bloomberg, demand for the greenback, judging by the basis swaps, is at a multi-year low. As long as the world is flooded with dollars, the US currency will weaken. So far, the situation has not changed. Only by the end of the year, some changes may occur. The regulator may decide to issue fewer Treasuries and announce the reduction of the quantitative easing program. If so, the US dollar may gain momentum.

So far, it has not happened. Traders are looking for new clues about the probable timing of QE. Importantly, the nonfarm Payrolls report may provide such a hint. It is considered a barometer for the health of the US economy. If the reading turns out to be positive, the likelihood of asset purchases tapering will increase. The report is due today. How will it affect the market and the US dollar? The latter may either rise or resume a long-term downtrend.

To start with, the Fed is quite cautious in its statements about the QE reduction in order not to sow panic in the market. There will be no rush. this is why investors may not receive any signal if the regulator does not wish it. The Fed policymakers are unlikely to give any clarity in the near future.

Jerome Powell's last speech did not cause any turbulence in markets or an increase in the US dollar. In the outgoing week, riskier assets won favor with investors.

As for NFP data, the US dollar may soar only if the figure turns out to be much stronger than expected. On average, the economy is projected to add 750,000 in August, while in July, the reading totaled 943,000. ADP data, ISM Manufacturing Employment results, and the weekly initial jobless claims report were not so positive.

If the NFP report is weak, the US dollar will nosedive against its six major rivals because central banks of many countries are more hawkish due to inflationary risks.

While the Fed is only hinting at a reduction in asset purchases, Europe plans to discuss the pace of the bond-buying program for the fourth quarter next week. If the ECB decides to taper the pace of asset purchases, the euro may gain momentum. The eurozone economy is steadily recovering, while inflation jumped by 3%.

The US dollar index fell to new lows - 92.40 and then to 92.20. These levels act as support.in case of negative data, it may drop to the July lows of 91.80. However, in the long term, the outlook for the US dollar remains bullish. The situation may change only if the US currency falls below the 200-day SMA (91.30).

The EUR/USD pair is likely to rise albeit slowly. The main catalyst will be the weak NFP report as well as the ECB's decision to reduce asset purchases.

On Friday, the support levels are located at 1.1845-1.1850. The bulls need to hold these levels. Otherwise, the pair may perform a corrective decline to 1.1810. If the euro continues to rally, the pair may soar to 1.1900 and 1.1970.

Traders should take into account that the euro has been exhibiting strength against the US dollar for two weeks in a row. So, the risks of a rise in Profit Take orders on long positions have increased.