NFP or Iran: Which factor will break the US Dollar Index out of its consolidation?

The US Dollar Index (DXY) trades around 99.95 at the time of writing on Friday, virtually unchanged on the day, as investors refrain from placing aggressive bets ahead of the release of the July US employment report. Ongoing geopolitical tensions in the Middle East continue to underpin the US Dollar (USD) as a safe-haven asset, while the Nonfarm Payrolls (NFP) report could offer fresh guidance on the Federal Reserve's (Fed) next monetary policy decision.

Regional tensions remain elevated after a Saudi official warned that some Iraqi militia factions, in coordination with the Iran-backed Houthis, are preparing to launch an attack against Saudi Arabia in the near future. Meanwhile, the Houthis claimed responsibility for an attack on a Saudi Oil tanker in the Gulf of Aden, while reports suggest that Iran is considering a framework that would restrict the passage of US and Israeli vessels through the Strait of Hormuz. These developments continue to support Oil prices, revive inflation concerns and reinforce expectations for a more hawkish monetary policy stance, helping keep US Treasury yields elevated and supporting the Greenback.

Market attention now turns to the employment data released by the Bureau of Labor Statistics (BLS). Economists expect the US economy to have added 80K jobs in July after 57K in June, while the Unemployment Rate is forecast to remain unchanged at 4.2% and annual Average Hourly Earnings growth is expected to hold at 3.5%. The figures could reshape market expectations for the Fed’s policy path, as investors continue to price in the possibility of another interest rate hike before the end of the year.

The NFP report is therefore expected to be the main catalyst for the US Dollar in the near term. A stronger-than-expected report would reinforce expectations for a more hawkish Fed and could provide additional support for the USD, while a weaker reading may weigh on the Greenback despite the ongoing support from geopolitical uncertainty.

US Dollar Index technical analysis

In the one-hour chart, the US Dollar Index trades at 99.91. The near-term tone is neutral, with price holding above the 100-period simple moving average (SMA) at 99.86 and the rising trend-line support coming in around 99.72, but still capped well below the 200-period SMA at 100.30. The Relative Strength Index (RSI) at 51.09 sits close to its midline, hinting at balanced momentum after the recent consolidation around the 100.00 figure.

On the topside, initial resistance is located at the horizontal barrier near 100.06, ahead of the 200-period SMA at 100.30 and a higher horizontal level at 100.45. On the downside, immediate support is seen at the nearby cluster formed by the 100-period SMA at 99.86 and the upward-sloping trend line at 99.72, with a more distant structural floor at 99.42. A clear break above 100.06 or below 99.72 would likely be needed to drive the next directional move in the index.