US Dollar holds up as interest-rate dislocation takes over

The US Dollar jumped higher overnight, and sees some positions being pared back this Thursday.
Main focus lies on ADP employment and ISM Service numbers for June.
The US Dollar Index is back above 103.00, but is unable to consolidate gains.

The US Dollar (USD) holds up on Thursday, albeit paring some earlier gains, after the Federal Reserve (Fed) FOMC Minutes showed a vote split in terms of hiking interest-rates in June instead of pausing. This tilted the minutes to a hawkish result, putting the future path in rates back on top of the bulletin board in terms of drivers. The prospect of further hikes by the Fed prompts the Dollar to diverge against several G10 currencies as some central banks have already announced either a steady monetary policy rate or even signalled cuts soon. The best example is the Polish Zloty, which falls back nearly 0.50% against the Greenback, as the country’s central bank has said that it is ready to cut interest rates soon.

On the economic data front, Thursday will bring the weekly jobless claims data ahead of Friday’s key US jobs report. Lorie K. Logan, the president of the Federal Reserve Bank of Dallas, is due to speak at 12:45 GMT. Although a lagging indicator, the JOLTS report for May – due at 14:00 GMT – is expected to shrink below the 10 million number.

Daily digest: US Dollar to face a lot of moving parts this Thursday

Some tensions and risks to keep in mind as well with an OPEC meeting taking place in Vienna today. Watch out for any comments on more Oil production cuts. Meanwhile, overnight Iran allegedly tried to seize two oil tankers in the Hormuz Strait. The attempt got foiled by the US military. Western Texas Intermediate (WTI) Crude oil price is very much correlated with the US Dollar.
Automatic Data Processing Inc. (ADP) is set to issue its monthly Employment change numbers for June at 12:15 GMT. Expectations are for a job gain of 228,000, lower than the 278,000 increase reported in the previous month.
More labor-market related data will come out at 12:30 GMT, namely the initial and continuing jobless claims for the week ended June 30. Initial claims are expected to edge up to 245,000 from 239,000 a week earlier, while the continuing claims are expected to increase from 1.742 million to 1.751 million.
Lorie K. Logan, the president of the Federal Reserve Bank of Dallas, will speak at 12:45 GMT.
The Institute for Supply Management (ISM) will come out with several indicators about the services sector at 14:00 GMT. The Services Purchasing Managers Index (PMI) for June is expected to increase from 50.3 to 51.0. Services New Order Index is seen jumping from 52.9 to 55.9, and the Services Prices Paid Index is anticipated to cool down from 56.2 to 53.3. In the latest Fed meeting , Fed Chairman Jerome Powell mentioned that services is one of the key components that is keeping core inflation sticky and elevated.
The US Bureau of Labor Statistics is to issue the JOLTS Job Openings report at 14:00 GMT. Although it is a lagging indicator, it has been important these past few months because it is considered a barometer to measure if the demand for work is still elevated or is cooling down. Markets expect job openings to decline to 9.93 million in May from 10.103 million in April.
With the US holiday on Tuesday, the US Energy Information Administration (EIA) will provide US stockpile information on crude and other derivatives at 15:00 GMT.
The Chinese central bank, the People’s Bank of China (PBoC), is stepping up its efforts to support the Yuan by fixing the Chinese currency this morning at 7.2098, lower than the 7.2458 estimated.
In the slew of the Fed FOMC report, John Williams, president of the Federal Reserve Bank of New York, said that inflation is still too high.
The US Dollar is stuck in choppy trading against the Euro as Purchasing Manager Index numbers fell below 50 for France and Italy. Both Europe and the US are thus seeing contractions in their PMIs. At the same time, the European Central Bank (ECB) published a survey of inflation expectations, which have been revised to the downside. This adds to evidence of subsiding inflation pressures, making it more likely that the ECB will end its hiking cycle sooner than markets anticipate.
The release of the Fed FOMC Minutes showed that there was a vote split in June, with some hawks in favor of hiking interest rates. This was considered as hawkish by market participants, as did the closing remark that all officials expect more rate increases, in plural, for the remainder of 2023.
Asian markets got spooked by the hawkish tone of the Fed and are seeing investors chun away from risk assets. The Japanese Topix is down 1.26%, and the Hang Seng is having a gruesome day as it falls nearly 3%. European equities take over the sour tone and are down over 1% halfway through the European morning trading session. US futures are also in the red, but only around 0.50%.
The CME Group FedWatch Tool shows that markets are pricing in a 91.1% chance of a 25 basis points (bps) interest-rate hike on July 26. Markets remain reluctant though to price in another rate hike for later this year, while the recent Fed Minutes clearly confirmed at least two more hikes are due instead of just one.
The benchmark 10-year US Treasury bond yield halted trading at 3.96% on Thursday after a wild ride on Wednesday evening, when the FOMC Minutes got published. Equities drop and bonds sold off, making rates shoot higher as more hikes look inevitable in the fall of this year.

US Dollar Index technical analysis: USD holding on above 103.00

The US Dollar jumped substantially in the first reaction on the FOMC Minutes on Wednesday, only to pare back some of its gains against a few of the G10 currencies. The dispersed move comes as investors are cherry picking the coins where the local central bank is supporting possibly more hikes, while the Greenback advances against those currencies supervised by central banks that have recently signalled to either have reached their pivot interest-rate level or will be cutting them soon. Proof of that is on the quote board, with the US Dollar strengthening 0.5% against the Polish Zloty (USD/PLN). Greenback also sees gains against Scandinavian pairs, up more than 0.25% against both the Norwegian Krone (USD/NOK) and the Swedish Krona (USD/SEK). This makes the US Dollar Index (DXY) head lower, though not in a firm nosedive move, but rather a step back that could be undone if the data later today supports the currency.

On the upside, look for 103.54 as the next key resistance level, which falls in line with the last week’s high. The 200-day Simple Moving Average (SMA) at 104.77 is still quite far away. So the intermediary level to look for is the psychological level at 104.00 and May 31 peak at 104.70.

On the downside, the 55-day SMA near 102.80 has proven its importance as it clearly underpinned price action on Friday and Monday by triggering a turnaround after the firm weakening of the Greenback. A touch lower, 102.50 will be vital to hold from a psychological point of view. In case the DXY slips below 102.50, more weakness is expected with a full slide to 102.00 and a retest of June’s low at 101.92.

US Dollar FAQs

What is the US Dollar?

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.

How do the decisions of the Federal Reserve impact the US Dollar?

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.

What is Quantitative Easing and how does it influence the US Dollar?

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.

What is Quantitative Tightening and how does it influence the 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.