US Dollar Holds Green Ahead of US ISM After German Engine Stutters

VaselineSeptember 3, 2024

0 4 minutes read

US Dollar Holds Green Ahead of US ISM After German Engine Stutters

The US dollar is gaining with the main contributor to the DXY decline.
US markets open after the Labor Day holiday and prepare for ISM PMI data.
The US Dollar Index has an important resistance level within reach for a breakout.

The US dollar (USD) traded broadly flat on Tuesday as it officially begins its trading week after US markets were closed on Labor Day Monday. The greenback is slightly higher against almost all major currencies on the list except the Japanese yen (JPY). Meanwhile, markets are getting a bit shaky on news that German carmaker Volkswagen is considering closing factories in its home country for the first time, a massive blow to the German government and the European economy.

Tuesday’s economic calendar features the Institute for Supply Management’s (ISM) manufacturing survey for August. Traders will be able to see how the US manufacturing sector is holding up. Looking at the recent headlines from Germany, a clear split between the two nations could drive the DXY higher.

Market Daily: Will US ISM Outpace Europe?

At 13:45 GMT, S&P Global will release its final manufacturing PMI number for August. The preliminary reading was 48 and is not expected to be revised.
At 14:00 GMT, the Institute for Supply Management (ISM) will release its production numbers for August:
The headline PMI is expected to come in at 47.5 from 46.8.
The Prices Paid component should reach 52.5 from 52.9.
The New Orders Index was 47.4 in July and the Employment Index was 43.4.
In addition to the ISM, the TechnoMetric Institute for Politics and Policy (TIPP) will release its economic optimism survey for September. The previous reading was at 44.5 with 46.2 expected.
Both US and European stocks are on the upswing after those German Volkswagen headlines. Markets fear another drop in output globally, not just locally in Europe.
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 49.9%, while there is a 41.5% chance that rates will be 75 bps (25 bps + 50 bps ) below current levels and an 8.6% probability of rates being 100 (25 bps + 75 bps) basis points lower.
The benchmark US 10-year yield is trading at 3.91%, down slightly on the day after opening at 3.93%.

Economic indicator

ISM Manufacturing PMI

The Institute for Supply Management’s (ISM) Manufacturing Purchasing Managers’ Index (PMI), published monthly, is a leading indicator that assesses business activity in the US manufacturing sector. The indicator is derived from a survey of manufacturing sourcing managers based on information they have collected within their respective organizations. Survey responses reflect the change, if any, in the current month compared to the previous month. A reading above 50 indicates that the manufacturing economy is generally expanding, a bullish sign for the US dollar (USD). A reading below 50 signals that factory activity is generally down, which is seen as bearish for the USD.

US Dollar Index Technical Analysis: Match US vs EU

The US Dollar Index (DXY) is at a crossroads this Tuesday, when ISM numbers could move the DXY above key resistance or trigger a firm rejection and send it back down. Expect to see a very spectacular DXY on the charts this week, with almost every trading day featuring substantial economic data.

Looking to the upside, 101.90 is very close and could be easily broken if the ISM comes in stronger. 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

Frequently asked questions about sense of risk

In the world of financial jargon, the two widely used terms “risk-on” and “risk off” refer to the level of risk that investors are willing to bear during the reference period. In a “risky” market, investors are optimistic about the future and more willing to buy risky assets. In a “de-risking” market, investors begin to “play it safe” because they are worried about the future and therefore buy less risky assets that are more certain to yield a return, even if it is relatively modest .

Typically during “risk on” periods, stock markets will rise, most commodities – except gold – will also gain in value as they benefit from a positive growth outlook. Currencies of nations that are large commodity exporters are strengthening due to increased demand and Cryptocurrencies are rising. In a “risk-off” market, Bonds rise – especially major government bonds – gold shines, and safe-haven currencies such as the Japanese yen, Swiss franc and US dollar all benefit.

The Australian dollar (AUD), Canadian dollar (CAD), New Zealand dollar (NZD) and minor currencies such as the ruble (RUB) and South African rand (ZAR) all tend to rise in markets that are “risk-on” .This is because the economies of these currencies depend heavily on commodity exports for growth and commodities tend to rise in price during risky periods.This is because investors anticipate higher demand for commodities in the future the cause of intensified economic activity.

The main currencies that tend to rise during “risk-off” periods are the US dollar (USD), the Japanese yen (JPY) and the Swiss franc (CHF). The US dollar, because it is the world’s reserve currency and because in times of crisis investors buy US government debt, which is seen as safe because the world’s largest economy is unlikely to default. The yen, due to increased demand for Japanese government bonds, as a large proportion are held by domestic investors, who are unlikely to withdraw them – even in a crisis. Swiss franc, as strict Swiss banking laws provide investors with increased capital protection.

VaselineSeptember 3, 2024

0 4 minutes read