US Dollar declines after mixed data, Fed in sight
- Markets foresee a hawkish hold stance by the FOMC, influencing the DXY Index in the upcoming sessions.
- US Job Openings and ISM PMI figures reported on Wednesday came in weak.
- The session highlight will be Fed Chair Jerome Powell’s presser.
The US Dollar Index (DXY) is trading mildly lower on the day at 106.2 ahead of the highly-anticipated Federal Open Market Committee (FOMC) monetary policy decision. Markets are betting on a hawkish hold stance from the Federal Reserve (Fed), which could make investors adjust their expectations on interest rates. Earlier in the session, mixed data pushed the index down.
Overall, the US economy exhibits robust growth and persistent inflation, putting upward pressure on US yields, which acted as a tailwind for the Greenback in the last sessions. A hawkish Fed has created a favorable environment for the Dollar due to policy divergences against its peers.
Daily digest market movers: DXY mildly down as markets digest mid-tier data
- The US Bureau of Labor Statistics (BLS) announced the number of job openings on the last working day of March to be 8.488M, below the anticipated 8.690M mark.
- The US Manufacturing sector showed signs of contraction in April per the Institute for Supply Management (ISM) Manufacturing Purchasing Managers Index (PMI), registering a decline from the previous month.
- According to Automatic Data Processing (ADP), private sector jobs in the US increased by 192K in April, slightly surpassing the projected increase of 175K jobs.
- Although ADPreading surpassed expectations, was lower than March's 208K job gain, indicating a potential slowdown in employment growth.
- Regarding expectations for the next Fed meetings, the odds of a cut in June fell below 10%, dipped below 25% in July, and reduced to less than 55% in September.
- US Treasury bond yields are declining, with the 2-year yield at 5.01%, the 5-year yield at 4.70%, and the 10-year yield at 4.65%.
DXY technical analysis: DXY outlook remains neutral as markets await directions
The indicators on the DXY daily chart reflect conflicting signals. The Relative Strength Index (RSI), which is in positive territory, has a negative slope suggesting downward price momentum. The Moving Average Convergence Divergence (MACD) indicator, though showing flat red bars, is also indicating sell signals representing potential bearish sentiment.
However, this potential selling momentum has not yet translated into a definitive price trend, possibly due to market participants awaiting clearer directions. Yet, the fact that the US Dollar Index is comfortably situated above its 20, 100, and 200-day Simple Moving Averages (SMAs) signals that upward pressure is still in play, pointing toward a continued presence of buyers in the market.
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.