US Dollar picks some bids ahead of NFP report
- The US Dollar has pared some of the recent losses favoured by a cautious market mood ahead of the NFP report.
- The US economy is expected to have created fewer jobs in October, partly due to the effect of hurricanes and strikes.
- Technical indicators show a loosening bullish momentum, which keeps 103.80 on the bears’ focus.
The US Dollar Index (DXY) is paring some losses on Friday’s European morning trading, with buyers returning after a four-day losing streak. A mild risk aversion ahead of the release of the US Nonfarm Payrolls report has increased support for the safe-haven US Dollar (USD).
The unexpected decline in US jobless claims and the sticky Personal Consumption Expenditures (PCE) Price Index failed to provide significant support to the US Dollar (USD), which hit fresh weekly lows on Thursday.
Stronger-than-expected Consumer Prices Index (CPI) in the Eurozone and some hawkish remarks from the Bank of Japan (BoJ) Governor Kazuo Ueda, lifted the Euro (EUR) and the Japanese Yen (JPY), respectively, and added pressure on the USD.
Daily digest market movers: US Dollar ticks up with key US data on tap
- The US Dollar’s downside attempts remain limited as investors bide their time ahead of the ISM Manufacturing PMI data and the latest US Nonfarm Payrolls report, less than one week ahead of the Federal Reserve’s (Fed) meeting.
- Investors’ bets that former President Donald Trump will win the US presidential election and implement an inflationary policy of low taxes, big spending and tariffs on imports is providing additional support to the US Dollar.
- US Nonfarm Payrolls are expected to have increased by 113K in October, down from the 254K advance seen in September. Hurricanes and strikes might distort the final numbers, so the unemployment rate – which is seen steady at 4.1% – is likely to have particular relevance.
- The ISM Manufacturing PMI is expected to have improved marginally to 47.6 from 47.2 in the previous month. Still, it would remain at levels reflecting contraction in the sector’s business activity.
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DXY technical outlook: Support at 103.85 remains in focus
The DXY index is moving within a horizontal channel, but the broader bullish trend appears to be losing steam and technical indicators show signs of a potential trend shift.
The 4-hour chart shows a bearish divergence in the Relative Strength Index (RSI) and a bearish cross between the 50- and 200-period Simple Moving Averages (SMA).
These negative signs keep the support area at 103.85 in play. Below here, the next target would be 103.40. To the upside, the index has some resistance at 104.20 ahead of the October peak at 104.63.
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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