Can the dollar's rally continue? Non-farm data and the Federal Reserve's path are key factors

The US Dollar Index has recently performed strongly, breaking through the 99.0 integer level, with eight out of the past ten trading days recording gains. Geopolitical tensions have boosted safe-haven demand for the dollar. However, the sustainability of this dollar rally is questionable, as multiple factors may limit its further rebound potential.

The “Just Right” Weakness in the Employment Market

The December non-farm payrolls report, scheduled for release on Friday (January 10), will be a key market focus. According to market expectations, the US will add about 60,000 jobs, with the unemployment rate possibly declining slightly to 4.5%, and hourly wages increasing by 0.3% month-over-month. It is important to note that this data is not affected by the US government shutdown and provides an important reference for assessing the true state of the labor market.

Earlier this week, labor market data was disappointing. ADP Research Institute data showed that US private sector employment increased by 41,000 in December, below the expected 50,000. The JOLTS job openings fell to 7.146 million, below the expected 7.6 million, hitting a new low in over a year. The national unemployment rate rose to 4.6%, reaching a four-year high.

These series of data reflect that tariff policy uncertainties and the AI boom continue to suppress employment momentum. In the short term, the labor market may enter a state of “no hiring, no layoffs” stagnation.

Fed Rate Cut Expectations Remain Unchanged

It is worth noting that despite the weakening labor market, the Federal Reserve’s monetary policy path remains largely unchanged. The market is currently pricing in two 25 basis point rate cuts within the year, with the first expected around late April.

From an inflation perspective, as the impact of tariffs on prices continues to cool, market focus has shifted to labor market performance. The AI boom supports the US economy in remaining relatively strong, so moderate weakness in the labor market is seen as “just right”—sufficient to curb inflation without threatening the rate cut cycle. Considering Trump’s administration’s efforts to keep oil prices low, unless the non-farm payroll report shows significant surprises, it is unlikely to change the Fed’s expectation of two rate cuts this year.

Goldman Sachs analysts believe that non-farm employment data in the range of 70,000 to 100,000 is most favorable for the stock market, aligning with a scenario of continued moderate economic expansion that neither reignites inflation fears nor threatens the rate cut cycle. If the data falls below 50,000, it will be interpreted as below the employment growth level needed to maintain economic stability, potentially triggering concerns of a sharp slowdown. If the data exceeds 125,000, the market may reassess the timing of the Fed’s first rate cut, delaying it until June.

Dollar Rally Faces Upward Pressure

Meanwhile, the US Dollar Index continues to strengthen supported by geopolitical turmoil, breaking through 99.0. Safe-haven demand driven by events in Greenland and tensions with Iran has boosted dollar demand.

However, further upside for the dollar may be limited. On one hand, the Fed’s rate cut expectations are relatively certain, and the 10-year US Treasury yield trend is downward, providing limited long-term support for the dollar. On the other hand, ongoing speculation about AI-related market bubbles raises concerns, and market risk sentiment could shift at some point. Against this backdrop, the dollar rally is unlikely to continue soaring.

Technical Outlook: Watch for Resistance at 99.0-99.6

From the daily chart of the US Dollar Index, since April last year, the index has been consolidating within the 98.0-100.0 range, without breaking this pattern. Currently, the medium-term support/resistance boundary is around 98.0.

If the dollar’s rebound is blocked at the strong resistance zone of 99.0-99.6, traders should be alert to the possibility of further downward testing of the 98.0 support. A break below 98.0 would open the downside space, potentially pushing the index further down to 97.5 or lower. Traders should closely monitor market reactions after the non-farm payroll data release to determine whether the dollar rally can sustain a breakout above resistance.