- The US Dollar strengthens post-FOMC decision with market participants setting their sights on Friday’s Nonfarm Payrolls data.
- In spite of signs of disinflation, the US economic landscape remains strong, prompting the Fed to maintain a data-dependent stance.
- Chair Powell commented that the bank will cut in case data continues showing progress.
On Thursday, the US Dollar, as assessed by the DXY index, saw a rebound following the Federal Reserve’s (Fed) session on Wednesday. Despite the increased chances for a cut in September, the solid status of the US economy led to demands for more data by Chair Jerome Powell before proceeding with the cut, which slightly reduced the odds of a cut in September though they still remain high.
The initial signs of disinflation are beginning to surface in the US economic outlook, further strengthening the market’s expectations for a September rate cut. Nevertheless, the broader economy is still exhibiting robustness as supported mainly by economic activity indicators.
Daily digest market movers: US Dollar recovers as markets asses fresh data
- On Thursday, data showed that the US manufacturing sector showed continued contraction with a mounting pace in July, as indicated by the ISM Manufacturing PMI dropping to 46.8 from June’s 48.5.
- This fell below market expectations of 48.8. Also, the Employment Index of the PMI survey witnessed a sharp decline to 43.4 from June’s 49.3.1.
- The New Orders Index also fell to 47.4 from 49.3. However, the Prices Paid Index, which measures inflation, saw a slight increase to 52.9 from June’s 52.1.
- Moreover, US citizens applying for unemployment benefits saw a rise of 249K in the week ending July 27, according to the US Department of Labor (DoL) on Thursday. These readings surpassed the initial market consensus of 236K, and were higher than last week’s gain of 235K.
- Key Nonfarm Payrolls data will be released on Friday, which will ultimately determine the market’s position in relation to the Fed’s decision in September.
DXY technical outlook: Index outlook hinges on NFPs on Friday as there is no clear dominant party
Following the Fed decision, the index sprang back above the 20-day SMA and it appears that buyers will labor to keep this level throughout the remaining session. The DXY continues to have support at 104.15 and 104.00, while resistance levels are found at 104.50 and 105.00.
Indicators in the meantime are pointing north with the Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD) showing a growing momentum for the buyers but it is still in a negative zone.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
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