The Dollar is Doing Something Strange...

James analyzes why the US dollar continues to strengthen despite poor NFP and unemployment figures released on Friday. He reviews his open positions across gold, Nikkei, DAX, and EUR/USD, examines fundamental drivers including sticky inflation and Fed hawkishness, and presents seven trade setups for the week ahead using technical analysis and COT positioning data.

Why the Dollar Strengthens When Jobs Data Weakens

On Friday, October 4th, the US jobs market delivered disappointing results. Non-farm payrolls came in at 29,000 versus expectations of 90,000—a massive miss. Unemployment data also disappointed, and PCE inflation printed bearish. Yet the US dollar rallied, with any selling pressure quickly absorbed by buyers. This counterintuitive move reveals a critical insight into modern currency markets: the dollar's strength is no longer primarily driven by labor market health, but by inflation dynamics and central bank positioning.

The Federal Reserve faces a dilemma. While employment weakness typically argues for rate cuts, sticky inflation well above the 2% target gives the Fed room to maintain a hawkish stance. Market pricing reflects this reality: an 80% probability of a hold at the October 28 meeting, but an 85% probability of a hike in December. As 2027 approaches, rate hike probabilities only increase. This hawkish forward guidance, combined with risk-off flows from geopolitical tensions in the Middle East, underpins dollar strength regardless of employment data.

Institutional Positioning Confirms Dollar Bullishness

Commitment of Traders (COT) data provides institutional-grade confirmation. On the most recent release (September 29), large speculators flipped long on the US dollar again after briefly turning short on September 15. This flip signals renewed institutional conviction in dollar strength. Conversely, the euro positioning tells the opposite story: institutions hold a deeply bearish stance with 57% short positioning and a net of -39,200 contracts. This divergence between dollar longs and euro shorts creates a powerful tailwind for EUR/USD downside.

The technical picture aligns with fundamentals. EUR/USD has broken below major daily support, retested the 200-day moving average, and now trades toward fresh lows. A fib zone drawn from the recent high to low aligns with minor support levels, setting up a classic break-retest-continuation pattern lower. For traders, this confluence of bearish COT data, hawkish Fed positioning, and technical breakdown creates a high-probability setup.

Trade Setups for the Week Ahead

Several currency pairs offer compelling opportunities. GBP/NZD is breaking above a multi-week range with bullish moving average alignment; a 61.8% fib retest of prior daily highs offers an attractive long entry. GBP/AUD presents a mean reversion opportunity as the Australian dollar's rate advantage erodes—the RBA's hawkish stance from late 2024 is no longer unique as other central banks turn restrictive. A 50% fib entry targeting a reversion toward 0.83 aligns with this thesis.

AUD/USD offers similar dynamics: the Australian dollar was heavily bought during the RBA's hiking cycle, but that advantage is fading as the Fed maintains hawkishness. Selling into the bullish moving average trend is unconventional, but fundamental strength in the dollar justifies the trade.

EUR/GBP is a standout setup. After breaking major daily support and retesting the 200-day moving average, the pair is positioned for a continuation lower toward 0.83. Mean reversion behavior in this closely correlated pair supports extended downside moves.

The US 30 (Dow) offers a simple bounce trade near the 200-day moving average, while USD/JPY remains fundamentally bullish but technically problematic due to Ministry of Finance intervention risk at 160.00 and 164.00 levels. Until intervention risk clarifies, staying sidelined is prudent despite the bullish bias.