US dollar falls on mixed US data

VaselineSeptember 5, 2024

0 3 minutes read

The US dollar weakened on Thursday after mixed US economic data.
The S&P Global Services PMI and ISM Services PMI showed expansion in the services sector.
Labor force data showed some signs of weakness.

On Thursday, the US dollar index (DXY), a measure of the USD against a basket of six currencies, experienced volatility following the release of mixed economic data from the United States. Labor force data showed weakness in the sector, while Services figures were strong.

With the US economic outlook mixed, signs of cooling in the labor market have investors betting on a bigger cut in September.

Daily Market Reasons: US Dollar Remains Weak After Labor Figures, Steady Bets

ADP Employment Change missed estimates, falling to 99,000 from 122,000, while the prior month was revised up to 111,000.
Initial claims came in at 227,000 from 232,000 previously, while continuing claims fell from 1.860 million to 1.838 million.
In addition, non-agricultural productivity edged up slightly to 2.5% from 2.3%, while labor cost fell from 0.9% to 0.4%.
The S&P Global Services PMI rose from 55.2 to 55.7, and the Composite PMI rose from 54.1 to 54.6. The ISM services PMI improved slightly from 51.4 to 51.5.
Contributing to the cooling labor market, the ISM Services PMI Employment Index fell from 51.1 to 50.2.
Following the data, the CME Fedwatch tool points to a 55% chance of a 25bps rate cut in September and a 45% chance of a 50bps cut, with further cuts to follow.

DXY Technical Outlook: Technicals suggest continued bearish momentum, testing support at 100.50

The technical indicators of the DXY index have resumed their downward trajectory and remain in negative territory. Despite a recent attempt at a rally, the index encountered resistance at the 20-day simple moving average (SMA), leading to a rejection of buyers.

As a result, DXY is poised to return to the 100.50 support level (August lows). Above, support levels include 101.30, 101.15 and 101.00, while resistance levels are located at 101.80, 102.00 and 102.30.

Indicator-wise, the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) continue to suggest bearish momentum as they are still in negative territory.

Frequently asked questions about US dollars

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 affects 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 5, 2024

0 3 minutes read

Daily Market Reasons: US Dollar Remains Weak After Labor Figures, Steady Bets

DXY Technical Outlook: Technicals suggest continued bearish momentum, testing support at 100.50

Frequently asked questions about US dollars

Vaseline

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