US Dollar gears up for pre-NFP data with JOLTS ahead
- The US Dollar trades sideways in a tight range this week ahead of key US employment data.
- Markets brace for JOLTS numbers after ISM Manufacturing PMI did not move the needle.
- The US Dollar Index remains just below an important technical level.
The US Dollar (USD) trades sideways on Wednesday ahead of some key US economic data. Meanwhile, equity markets have a severe hangover with tech stocks selling off. The nosedive took place after NVIDIA (NVDA) received a subpoena from the US Justice Department on whether the chipmaker violated antitrust laws.
On the economic data front, all eyes will be on the appetiser preceding the US Jobs Reports with the Nonfarm Payrolls (NFP) release on Friday, and that is the JOLTS Job Openings release on Wednesday. Although there is no correlation between both numbers, the lagging US JOLTS Job Openings report can reveal if certain sectors are cutting down on their demand for labor force. Markets are still to make up their mind if the US Federal Reserve (Fed) will cut by 25 or 50 basis points in September.
Daily digest market movers: Focus on employment data this week
- During US trading hours on Tuesday, news reported that the US Justice Department has subpoenaed NVIDIA (NVDA) for possible violations of antitrust laws. This triggered a selloff in the broader tech space that spilled over into the Asian and European session.
- At 11:00 GMT, the Mortgage Bankers Association will release its Mortgage Applications Index for the last week of August. The previous number was a slim 0.5%.
- At 12:30 GMT, the US Gods and Trade Balance data will be released. For July, a deficit of $79 billion is expected after June's deficit of $73.1 billion.
- At 14:00 GMT, the JOLTS Job Openings report for July will be released. June’s number came in at 8.184 million vacancies, with 8.1 million expected for July. At the same time, Factory Orders data is expected to jump out of contraction by 3.3% in June to a positive 4.7% in July.
- Equities are selling off on the back of the Nvidia subpoena. In Japan, both the Nikkei and the Topix index are down nearly 4%. European equities are opening more than 1% lower on the day.
- The CME Fedwatch Tool shows a 59.0% chance of a 25 basis points (bps) interest rate cut by the Fed in September against a 41.0% chance for a 50 bps cut. Another 25 bps cut (if September is a 25 bps cut) is expected in November by 40.0%, while there is a 46.8% chance that rates will be 75 bps (25 bps + 50 bps) below the current levels and a 13.2% probability of rates being 100 (25 bps + 75 bps) basis points lower.
- The US 10-year benchmark rate trades at 3.81%, the lowest level this week.
US Dollar Index Technical Analysis: JOLTS can do the trick
The US Dollar Index (DXY) looks to be stuck in a tight range, remaining there for now after Tuesday’s data was unable to move the needle. With the JOLTS Job Openings report on Wednesday, the assumption is the same: any number that comes in substantially above or below consensus will move the DXY in either direction. Meanwhile, markets are giving a bigger chance to a 50 basis point rate cut by the Fed this month, while data does not support that stance.
Looking up, the first resistance at 101.90 could easily be broken should JOLTS report come in stronger than expected. Further up, a steep 2% uprising would be needed to get the index to 103.18. Finally, a 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 (the low from December 28) holds as support, although it looks rather feeble. Should it break, the low from July 14, 2023, at 99.58, will be the ultimate level to look out for. Once that level gives way, early levels from 2023 are coming in near 97.73.
US Dollar Index: Daily Chart
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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