Video analysis
The Dollar is in Trouble!
NFP miss signals dollar weakness, but inflation remains the real driver.
James LNE analyzes a significant miss in US nonfarm payrolls (29K vs 90K forecast) and rising unemployment (4.2% vs 4.1%), which triggered immediate dollar weakness across major pairs. Despite the poor labour data and his existing short positions in euro-dollar and gold moving into drawdown, he maintains a cautiously bullish dollar bias pending the next inflation print, arguing that the Federal Reserve's primary focus remains inflation control rather than employment.
The Dollar's Resilience After a Labour Market Shock
On October 2, 2026, the US labour market delivered a significant disappointment. Nonfarm payrolls printed at just 29,000 versus a consensus forecast of 90,000—a miss of over 60,000 jobs. Simultaneously, the unemployment rate ticked up to 4.2% from 4.1%, and average hourly earnings decelerated to 3.0% from 3.1%. By any measure, this was a weak employment report that sent immediate shockwaves through currency markets.
The US dollar index took a sharp hit on the five-minute timeframe, with euro-dollar and gold both moving against positions that had been profitable moments before the data release. The Watchtower's institutional-grade assessment of dollar strength fell from 60 to 46 in the wake of the miss, reflecting the deterioration in labour market fundamentals. For traders holding dollar longs, the question became urgent: has the dollar's recent rally run out of steam?
Why Inflation, Not Employment, Remains the Anchor
The critical insight lies in understanding the Federal Reserve's current policy framework. While the labour data was undeniably poor, the Fed's primary focus remains inflation control, not employment stabilization. Current inflation metrics tell a concerning story: core PCE sits at 3.0% year-on-year, headline PCE at 3.4%, and producer prices (PPI) at 5.4%—all well above the Fed's 2% target.
The Fed hiked rates to 4% on September 16 and is expected to hold at the next meeting on October 28, with markets pricing a 76% probability of a hold but still expecting future hikes. Officials have explicitly tempered expectations for back-to-back moves, yet terminal rate expectations remain near 4.9%. This hawkish undertone persists because inflation has not yet cooled sufficiently to declare victory. Until the next CPI print on October 14—which will measure both headline and core inflation—the Fed's bias remains cautious and potentially hawkish.
Seasonality and Technicals Support Dollar Strength
Beyond central bank policy, structural factors favour continued dollar strength. The dollar's seasonal pattern shows it is only halfway through a bullish cycle based on 15, 10, and 5-year historical averages. Additionally, US Treasury yields remain elevated relative to other developed markets, providing a fundamental bid for the currency.
From a technical perspective, the dollar has recently broken out of a year-long consolidation range. A pullback or retest of support levels would be healthy for continuation, but a break back into that range would represent a significant loss of momentum. The pair composition for euro-dollar still favours the dollar by 14 points despite the poor labour data, suggesting that institutional positioning has not capitulated.
The path forward hinges on inflation. If the October 14 CPI print shows cooling pressures, the dollar could face sustained weakness and potentially retreat into its old trading range. Conversely, if inflation remains sticky or re-accelerates, the Fed's hawkish bias will persist, and the dollar's bull cycle will likely extend. For now, the labour market miss is a speed bump, not a reversal signal.
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