Market Data 
- The US Dollar gets support from Kansas Fed President Schmid with hawkish tone.
- Focus this Thursday on US PMI’s for August to provide some counterweight.
- The US Dollar index trades just above 101.00 and could fall to 100.00 if weak sentiment persists.
The US Dollar (USD) trades broadly flat after it saw heavy selling at the start of the US session on Wednesday, triggering another leg lower towards a fresh 2024 low. The Nonfarm Payrolls revision highlighted 818,000 fewer jobs than previously estimated, the largest downward revision in over a decade, confirming market concerns about the US job market. Later, the release of the Fed Minutes for the July meeting confirmed that some members of the Federal Open Market Committee (FOMC) vowed for a rate cut back then, making this move almost certain in September.
Although it looks like nothing can go wrong, big warning signs still need to be issued here. The Federal Reserve and Fed Chairman Jerome Powell have already advocated plenty of times that the risk of cutting too soon is one of their biggest fears. With the preliminary August Purchasing Managers Index (PMI) numbers, any strong figures might dampen the hope for either a big cut in September or further cuts down the line.
Daily digest market movers: Fed’s Schmid delivers hawkish remarks
- Hit the breaks, no white flag just yet, according to Kansas Fed President Jeffrey Schmid. Schmid said in early US comments that there could still be a pickup in demand and that the overnight Nonfarm Payrolls revisions did not change his stance on monetary policy. The Fed has time to decide and needs to watch more data points first before pulling the trigger, according to Fed’s Schmid. A hawkish shift, away from the dovish tone the Fed Minutes delivered on Wednesday.
- Markets are having difficulties to read the Purchasing Managers Index numbers from Europe. France saw an uptick in its Services PMIs driven by the Olympic Games taking place, while Germany saw its Services PMIs come in below expectations. The German Manufacturing component even fell further into contraction, which is bad news for Europe’s main economy.
- At 12:30 GMT, the weekly US Jobless Claims are due:
- Initial Jobless Claims are expected to rise to 230,000 from 227,000.
- Continuing Claims stood at 1.864 million last week. No forecast available.
- At 13:45 GMT, S&P Global will release the US preliminary PMIs for August:
- The Services index is expected to remain quite stable, falling to 54 from 55 a month earlier.
- The Manufacturing index is not expected to move, remaining in contraction territory at 49.6.
- The Composite index is seen declining to 53.5 from 54.3.
- At 14:00 GMT, Existing Home Sales are due to come out. Seeing the recent sharp decline in mortgage applications from the Mortgage Bankers Association data released Wednesday, a decline in Existing Home Sales for July is expected as well. Sales fell by 5.4% the previous month.
- The Kansas Fed Manufacturing Activity tracker for August will be released at 15:00 GMT. The previous print was -12.
- Asian equity markets are in the green across the board in anticipation that rate cuts from the Fed are now unavoidable. US futures are lagging, though, by trading rather flat.
- The CME Fedwatch Tool shows a 67.5% chance of a 25 basis points (bps) interest rate cut by the Fed in September against a 32.5% chance for a 50 bps cut. Another 25 bps cut (if September is a 25 bps cut) is expected in November by 39.7%, while there is a 46.9% chance that rates will be 75 bps below the current levels and a 13.4% probability of rates being 100 basis points lower.
- The US 10-year benchmark rate trades at 3.81%, printing a fresh low for the week.
Economic Indicator
S&P Global Services PMI
The S&P Global Services Purchasing Managers Index (PMI), released on a monthly basis, is a leading indicator gauging business activity in the US services sector. As the services sector dominates a large part of the economy, the Services PMI is an important indicator gauging the state of overall economic conditions. The data is derived from surveys of senior executives at private-sector companies from the services sector. Survey responses reflect the change, if any, in the current month compared to the previous month and can anticipate changing trends in official data series such as Gross Domestic Product (GDP), industrial production, employment and inflation. A reading above 50 indicates that the services economy is generally expanding, a bullish sign for the US Dollar (USD). Meanwhile, a reading below 50 signals that activity among service providers is generally declining, which is seen as bearish for USD.
Next release: Thu Aug 22, 2024 13:45 (Prel)
Frequency: Monthly
Consensus: 54
Previous: 55
Source: S&P Global
US Dollar Index Technical Analysis: Fed sees the issue and sends Schmid to save the day
The US Dollar Index (DXY) has been falling like a rock this week and will very likely be unable to avoid a weekly loss. However, traders should refrain from diving in massively in trying to jump on the “sell the dollar” train as there are some elements to keep in the back of one’s mind. As it stands, markets are expecting a 75 bps rate cut by November. That is a very big cut considering that the Fed is until this date still data dependent.
In this context, there is a big risk for a sharp upward correction in the DXY to recover some earlier losses. If US PMI numbers remain strong or even tick up further andFed Chairman Jerome Powell says that the Fed still remains data dependent and will want to watch recent data first before considering to start cutting, that would be a huge disappointment for markets. Traders seem to be expecting too many toys from Santa, while Santa might say he will want to wait with his deliveries of gifts in order to be sure that the market has been good enough.
Looking up, the DXY faces a long road to recovery. First, 101.90 is the level to reclaim. A steep 2% uprising would be needed to get the DXY to 103.18 from where it is trading now, around 101.00. A very heavy resistance level near 104.00 not only holds a pivotal technical value, but it also bears the 200-day Simple Moving Average (SMA) as the second heavyweight to cap price action.
On the downside, 100.62 (low from December 28) will be the next vital support in order to avoid another meltdown. Should it break, the low of July 14, 2023, at 99.58 will be the ultimate level to look out for.
US Dollar Index: Daily Chart
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.
