The US dollar is trading broadly flat in the build-up of non-farm payrolls data

VaselineSeptember 2, 2024

0 4 minutes read

The US dollar is trading broadly flat in the build-up of non-farm payrolls data

The US dollar is trading broadly flat near Friday’s close.
US markets are closed on Monday for the Labor Day holiday.
The US dollar index is in the higher 101.00 region.

The US dollar (USD) is on the sidelines on Monday, with a very mixed picture on the chart against most major currencies. The US dollar starts this week with a lull due to the US Labor Day holiday, but the economic calendar will pick up speed heading into Friday’s main event. The first Friday of the month will bring the US Jobs Report, with non-farm payrolls and other payroll data to keep the markets going.

In addition to the all-important wages data, the calendar will also include Purchasing Managers’ Index (PMI) data, which tends to move markets as it provides fresh clues about the state of the economy. This could mean that the US dollar index could have already moved substantially ahead of Friday’s main event.

Daily market reasons: take it easy

US markets are closed on Labor Day Monday.
China has warned Japan of economic retaliation over potential chip cuts, according to Bloomberg.
On Saturday, the release of China’s purchasing managers’ index figures for August signaled that the decline in the country’s manufacturing sector is continuing. The PMI came in at 49.1, down from 49.4 seen a month earlier.
Equities are struggling across the board, with minor losses for all European indices and US futures as well.
The CME Fedwatch tool shows a 69.0% chance of a 25 basis point (bps) interest rate cut by the Fed in September, compared to a 31.0% chance of a 50 basis point cut. Another 25 bps cut (if September is a 25 bps cut) is expected in November by 48.9%, while there is a 42.0% chance that rates will be 75 bps (25 bps + 50 bps ) below current levels and a 9.1% probability of rates being 100 (25 bps + 75 bps) basis points lower.
The benchmark US 10-year yield is trading at 3.90% and will remain unchanged as US bond trading closes on Monday.

Technical Analysis of the US Dollar Index: A Big Failure

Purely technical traders, those who don’t look at the data or take any primary risk, will tell you that the US Dollar Index (DXY) failed to deliver on Friday. Although the recovery looked solid, DXY closed below 101.90, which could mean more trouble ahead. A rejection could now occur, blocking the recovery rally, pushing DXY back towards 100.62 from a purely technical trading point of view.

Looking to the upside, 101.90 still remains the first level to claim. A steep 2% rally would be needed to bring the index to 103.18. A very high resistance level near 104.00 not only holds key technical value, but also carries the 200-day simple moving average (SMA) as the second heavyweight limiting price action.

On the downside, 100.62 (December 28 low) holds as support, although it looks quite weak. Should it break, the July 14, 2023 low at 99.58 will be the ultimate level to watch. Once this level breaks, early 2023 levels approach 97.73.

US Dollar Index: Daily Chart

US Dollar FAQ

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 banknotes. It is the world’s most heavily traded currency, accounting for more than 88% of total global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, as of 2022. After World War II world, the USD has taken 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 disappeared.

The most important factor influencing the value of the US dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to ensure price stability (inflation control) and to promote full employment. Its main tool for achieving these two objectives is the adjustment of interest rates. When prices rise too fast and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the value of the USD. When inflation falls below 2% or the unemployment rate is too high, the Fed can lower interest rates, which weighs on interest rates.

In extreme situations, the Federal Reserve can also print more dollars and engage in 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 (for fear of default). It is a last resort when simply lowering interest rates is unlikely to achieve the desired result. It was the Fed’s preferred weapon to combat the credit crunch that occurred during the Great Financial Crisis of 2008. This involves the Fed printing more dollars and using them to buy US government bonds, mainly 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 of maturing bonds it holds in new purchases. It is usually positive for the US dollar.

VaselineSeptember 2, 2024

0 4 minutes read

Daily market reasons: take it easy

Technical Analysis of the US Dollar Index: A Big Failure

US Dollar FAQ

Vaseline

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