US Dollar continues its decline after Wednesday’s data
- US Dollar is under further scrutiny following dismal ADP and ISM Services PMI data
- Markets firming up their view of a September Fed rate cut.
- Investors are turning their attention towards the forthcoming Nonfarm Payrolls data from June on Friday.
The US Dollar, represented by the DXY Index, has continued to show weakness as traders assess a series of Wednesday data releases. US traders will remain on the sidelines, celebrating Independence day.
Concerns raised by signs of disinflation and a slowing labor market in the US are being taken into account by market participants, with a September rate cut now seeming more likely. Federal Reserve (Fed) officials are maintaining a conservative stance, however, starting to show concerns about the labor market struggles.
Daily digest market movers: US Dollar softens further amidst poor data, markets prepare for Nonfarm Payrolls
- With US traders off to celebrate Independence Day, the market is left to digest Wednesday's data releases.
- Private sector employment reported by Automatic Data Processing (ADP) came in lower than expected, with an increase of 150K jobs in June versus a forecast of 160K.
- Additionally, the weekly Jobless Claims came in at 238K, which was above the expected figure of 235 K.
- The US service sector displayed contraction in June signified by the ISM Services PMI, which hugely missed market expectations of 52.5 by declining to a record low of 48.8 from 53.8 in May.
- Minutes from the Federal Reserve’s June 11-12 meeting indicated that officials do acknowledge a slowing US Economy and easing price pressures, yet they refrained from any commitment to rate cuts, preferring a cautious data-dependant approach.
- Investors are now shifting their attention to Friday's significantly important June Nonfarm Payrolls report. The Bloomberg consensus predicts 190K jobs, dropping from 272K in May, with 'whisper numbers' forecasting 198K.
DXY Technical Outlook: DXY experiences further headwinds and loses 20-day SMA
The DXY technical outlook turned negative after the index fell below the 20-day Simple Moving Average (SMA). With both the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) now in negative territory, the market is looking at the potential for further decline towards the 105.00 and 104.50 supports if data continues to disappoint.
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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