US Dollar struggles as buyers digest inflation and labor market data
- US Dollar continues struggling as buyers take a breather.
- US PCE Prices Index fell to 2.1% yearly in September, while the core inflation remains steady at 2.7%.
- US Jobless Claims fall to 216K, against market expectations of an increase to 230K.
The US Dollar Index (DXY) trades softer on Thursday despite persistent inflation in the United States, as measured by the Personal Consumption Expenditure (PCE) Prices Index. Additionally, the number of Initial Jobless Claims decreased more than expected for the last week of October, but the Greenback continues struggling for traction in the latter half of the week.
The DXY index has displayed a mixed path amid conflicting economic data. Strong ADP Employment Change figures and upwardly revised September ADP data were offset by downwardly revised Q3 GDP growth. The upcoming Nonfarm Payrolls (NFP) report on Friday could significantly impact the DXY's direction.
Daily digest market movers: US Dollar eases on profit-taking despite strong data
- The US PCE Prices Index rose moderately by 2.1% YoY in September, lower than the previous 2.2% but below the consensus of 2.2%.
- Core PCE, more relevant for the Fed, remained steady at 2.7%, against market expectations of a decline to 2.6%.
- Despite market consensus expecting an increase to 230K, Initial Jobless Claims fell to 216K in the week of October 25.
- Economists predict the the NFP to hit 113K new payrolls in October, significantly lower than September's 254K. The Unemployment Rate is anticipated to remain unchanged at 4.1%.
- Market participants will closely monitor employment data for insights into the Fed's interest rate decision-making.
- As for now, markets are expecting a 25 bps cut at next week’s Federal Open Market Committee meeting next week.
DXY technical outlook: DXY index consolidates near 104.50 support
The DXY index remains consolidating, possibly preparing to retest the 200-day SMA support at 103.50. The Relative Strength Index (RSI) remains elevated near overbought territory but is trending down. The Moving Average Convergence Divergence (MACD) indicator is generating smaller green bars, indicating a weakening momentum.
Supports: 104.50, 104.30, 104.00Resistances: 104.70, 104.90, 105.00
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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