US Dollar consolidates after Fed-related sharp losses
- The US Dollar trades broadly sideways after Wednesday’s wild ride following the Fed decision to hold interest rates.
- Traders took the Fed's rate decision and rhetoric as less hawkish than feared.
- The US Dollar Index holds ground above 105.50 despite several attempts from bears to break lower.
The US Dollar (USD) enters some calm waters on Thursday after a rollercoaster ride on Wednesday following the Federal Reserve’s (Fed) monetary policy decision. The big batch of economic data on Wednesday together with the Fed’s policy meeting and Chairman Jerome Powell’s speech was the dream scenario for an uptick in the US Dollar Index (DXY), but this scenario failed to materialize and the index fell to 105.43, near the low of this week. Although it looked for a moment that the US Dollar could weaken further, it still holds ground and is likely to stay there until the US Nonfarm Payrolls data on Friday as the next catalyst.
On the economic data front, some appetisers ahead of the Nonfarm Payrolls print and the broader employment report on Friday. Traders can feast on the weekly Jobless Claims numbers and the Challenger Job Cuts number to look for clues if those announced layoffs during the recent earnings season are starting to weigh on the labor market. However, expectations are for traders to keep their powder dry for Friday.
Daily digest market movers: Here come the layoffs
- A substantial move on the charts in USD/JPY and EUR/JPY on Wednesday, pointing to a possible intervention again from either the Bank of Japan (BoJ) or the Ministry of Finance, though no official confirmations were issued.
- Kickoff this Thursday at 11:30 GMT with the April Challenger Job Cuts report. the previous number was at 90,309.
- At 12:30 GMT, the bigger part of the data for Thursday is to be released:
- Weekly Initial Jobless Claims expected to head to 212,000 from 207,000.
- Continuing Claims were at 1.781 million last week, with no forecast available.
- The US Goods and Trade balance from March is to be released:
- The Goods Trade Balance deficit was previously at $91.8 billion.
- Goods and Services Trade Balance expected to head from a deficit of $68.9 billion to a deficit of $69.1 billion.
- Nonfarm Productivity growth for the first quarter of 2024 should slow down from 3.2% to 0.8%.
- Unit Labor Costs are expected to accelerate substantially, from 0.4% to 3.2%.
- Near 14:00 GMT, the monthly factory orders for March are expected to increase by 1.6%, higher than the 1.4% advance seen a month earlier.
- Equities trade mixed on Thursday morning, with European equities mildly in the red while US Futures are mildly in the green.
- The CME Fedwatch Tool suggests a 91.1% probability that June will still see no change to the Federal Reserve's fed fund rate. Odds of a rate cut in July are also out of the cards, while for September the tool shows a 56% chance that rates will be lower than current levels.
- The benchmark 10-year US Treasury Note trades around 4.61% and keeps lingering around this level.
US Dollar Index Technical Analysis: Burning through cash
The US Dollar Index (DXY) had a roller coaster ride on Wednesday while European markets were closed for Labor Day. Despite the moves and selling pressure in the DXY, the floor at 105.50 still holds despite three failed breaks in the past two weeks. Dollar bulls are buying at these levels clearly, as support is still there. This could result in a breakout soon, with either bulls stepping away and letting the DXY drop or sellers giving up, seeing DXY shooting higher.
On the upside, 105.88 (a pivotal level since March 2023) needs to be recovered again with a daily close above it, before targeting the April 16 high at 106.52 for a third time. Further up and above the 107.00 round level, the DXY index could meet resistance at 107.35, the October 3 high.
On the downside, 105.12 and 104.60 should act as support ahead of the 55-day and the 200-day Simple Moving Averages (SMAs) at 104.40 and 104.10, respectively. If those levels are unable to hold, the 100-day SMA near 103.75 is the next best candidate.
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.