US Dollar plunges post ADP data and ahead of FOMC minutes
- US Dollar saw severe selling pressure after soft ADP figures from June.
- Markets boosted their bets for a September Fed rate cut.
- Keen market focus remains on the upcoming FOMC minutes from the June meeting.
On Wednesday, the US Dollar, represented by the Dollar Index (DXY), declined to its lowest level since June 18 at around 105.20 following the release of robust ADP labor market data. In addition, market participants eagerly anticipate the meeting minutes from the June Federal Open Market Committee (FOMC) event, which might influence interest rate expectations.
Signs of disinflation and a cooling labor market are becoming evident in the US economy, thereby fuelling belief in a rate cut possibly occurring in September. Federal Reserve (Fed) officials, however, exhibit restraint and maintain their data-dependent stance.
Daily digest market movers: US Dollar loses ground following robust ADP data, markets await FOMC Minutes
- Private sector employment in the US reported by ADP reflected a decline with a rise of 150K in June, contrasted against a revised number of 160K expected.
- Later this week, the highlight resides with the June Nonfarm Payrolls data due on Friday. Bloomberg consensus predicts a drop to 190k from 272k in May, yet whisper numbers currently point to 198k.
- Session late Wednesday will see another critical event with the impending release of FOMC June Meeting Minutes.
- Market perceives a 70% likelihood of a September rate cut.
DXY technical outlook: Bulls give up and lose 20-day SMA
On Wednesday, the outlook for the DXY turned negative in the short term with both the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) now on negative terrain.
The highlight is that the bulls lost their position above the 20-day Simple Moving Averages (SMAs). The market should monitor potential fallbacks toward the 105.00 and 104.50 zones. On the upside, the former support of the 20-day SMA at 105.40 is now a resistance line.
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.
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