- US S&P PMI figures from April came in softer than expected and made markets dump the USD.
- Hawkish bets and high US Treasury yields may limit the downside for the USD.
- All eyes are set on PCE and GDP data on Thursday and Friday.
The US Dollar Index (DXY) is trading softly at 105.70 tallying daily losses on Tuesday’s session. The Federal Reserve (Fed) has been sending a consistently hawkish message, which might limit the Greenback’s losses as markets delay the start of the easing cycle. Investors are also keeping an eye on vital economic reports due this week, including the preliminary figures of Q1’s Gross Domestic Product (GDP) Growth Rate and the Personal Consumption Expenditures (PCE) Price Index from March to gain further insight into the economy’s health. During Tuesday’s session, S&P PMIs came in lower than expected and made the USD face selling pressure.
Despite the weak PMIs, the US economy exhibits overall resilience. The Fed’s stance leans hawkish, manifesting itself in reduced odds of rate cuts in the near future and not until September. PCE and GDP data later this week will likely fuel volatility in markets as they will continue shaping the expectation on the next Fed decisions.
Daily digest market movers: DXY declines following weak April S&P PMIs, hawkish bets on Fed
- The S&P Global Composite Purchasing Managers Index (PMI) fell to 50.9 in April’s flash estimate, indicating slower private sector growth in the US from March’s 52.1.
- The S&P Global Manufacturing PMI demonstrated a more noticeable drop from March’s 51.9 to 49.9 in April, suggesting a contraction in US manufacturing sector activity.
- Similarly, April’s S&P Global Services PMI decreased from 51.7 to 50.9.
- Following the consistent hawkish stance from the Federal Reserve (Fed) on US monetary policy, the first rate cut was pushed to September, but it isn’t fully priced in.
- US Treasury bond yields are dwindling with the 2-year yield at 4.93%, 5-year yield at 4.61%, and 10-year yield at 4.58%.
DXY technical analysis: DXY displays a declining momentum, overall bullish outlook holds
The indicators on the daily chart reflect contrasting outlooks. The Relative Strength Index (RSI) is on a negative slope albeit in positive territory, indicating a possible slowdown in buying momentum as the indicator slopes downwards. However, it is crucial not to overlook that it still remains in the bulls’ region, suggesting some continued bullish strength. Simultaneously, the Moving Average Convergence Divergence (MACD) shows decreasing green bars, also indicating a loss of bullish momentum as the magnitude of buyers seems to be dipping. This is a warning bell for the bulls, suggesting that they might be gradually losing ground.
Regarding the Simple Moving Averages (SMAs), they manifest a more bullish image. Despite a negative short-term outlook, the DXY is above the 20, 100, and 200-day SMAs, signifying a more positive medium to long-term perspective. It suggests that bulls still retain control in the larger picture, providing hope for a potential recovery of bullish momentum.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named 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 during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
