- US Dollar weakened on Thursday after mixed US economic data.
- S&P Global Services PMI and ISM Services PMI showed expansion in the service sector.
- Labor data showed some signs of weaknesses.
On Thursday, the US Dollar Index (DXY), a measure of the USD against a basket of six currencies experienced volatility following the release of mixed economic data from the United States. Labor data showed weakness in the sector, while Services figures were strong.
With the US economic outlook mixed, signs of cooling in the labor market are making investors put some bets on a larger cut in September.
Daily digest market movers: US Dollar stands weak after labor figures, steady dovish bets
- ADP Employment Change missed estimates, falling to 99,000 from 122,000, while the prior month was revised down to 111,000.
- Initial Claims came in at 227,000 from 232,000 previously, while Continuing Claims fell from 1.860 million to 1.838 million.
- In addition, Nonfarm Productivity saw a small uptick to 2.5% from 2.3%, while Labor Cost fell from 0.9% to 0.4%.
- S&P Global’s Services PMI rose from 55.2 to 55.7, and the Composite PMI increased from 54.1 to 54.6. The ISM’s Services PMI improved slightly from 51.4 to 51.5.
- Contributing to the cooling labor market, the Employment Index in the ISM Services PMI declined from 51.1 to 50.2.
- Following the data, the CME Fedwatch Tool indicates a 55% chance of a 25 bps rate cut in September and a 45% chance of a 50 bps cut, with further cuts expected thereafter.
DXY technical outlook: Technicals suggest continued bearish momentum, testing support at 100.50
The DXY index’s technical indicators have resumed their downward trajectory and remain in negative territory. Despite a recent recovery attempt, the index encountered resistance at its 20-day Simple Moving Average (SMA), resulting in a rejection of buyers.
As a result, the DXY is poised to revisit the 100.50 (August lows) support level. Above, support levels include 101.30, 101.15, and 101.00, while resistance levels are located at 101.80, 102.00, and 102.30.
Indicators-wise, the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) continue to suggest bearish momentum as they are still in negative terrain.
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.
