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- US Dollar traders turn cautious ahead of US job report
US Dollar traders turn cautious ahead of US job report
- The US Dollar does not get any tailwinds from market pricing in more rate hikes.
- All eyes turn to Nonfarm Payrolls data on Friday.
- The US Dollar Index hovers near 103.00 in search of direction.
The US Dollar (USD) is unable to bank on the additional rate increase that markets are starting to get priced in for the US, with US Fed Futures showing a rise in the probability of a second hike in November. Although this should not come as a surprise to the markets, the sudden concern has pushed equities around the world in the red for this week and it weighs on the Greenback as well, which is unable to retain its status as safe haven. The quote board shows a very dispersed Greenback, with only smaller gains and rather larger losses against most traded currencies.
On the economic data front, only one big event, or rather a whole report of data set to come out. With the first Friday of the month comes the US jobs report, with all eyes on the change in Nonfarm payrolls. After the positive slew of data from ADP private payrolls and the stronger ISM services numbers, the question will be if the Nonfarm Payrolls report will be strong enough as expectations are tilting towards an upside surprise.
Daily digest: US Dollar to face US jobs data
- Main data point for this Friday comes from the US Bureau of Labor Statistics with the US Nonfarm Payroll number print for June expected to come in at 225,000, lower than the previous 339,000 increase. Average Hourly Earnings will get the attention next with the monthly number expected to be unchanged at 0.3%, while the yearly increase is expected to decline slightly from 4.3% to 4.2%.
- A quick sidenote for the Nonfarm Payroll number: the lowest estimate comes in at 110,00 while the highest estimate tops out at 350,000. The US Dollar will either devalue substantially should the actual number come out below the lowest estimation, while an appreciation of the Greenback is expected should the actual number break above the high estimate of 350,000.
- US Treasury Secretary Janet Yellen said in Beijing that the US seeks to diversify, not decouple with China. Any US security measures are activated to protect national security, not to gain an economic edge on China.
- Another red day for Asian equities, with the Japanese Topic down0.97% and the Hang Seng losing 1%. European equities are not fully taking over the sour tone and are rather flat than selling off. A similar pattern can be seen for US equity futures, which are trading at marginal losses.
- The CME Group FedWatch Tool shows that markets are pricing in a 89.9% chance of a 25 basis points (bps) interest-rate hike on July 26. Chances of a second hike in November are up 36.7% at the moment. So no full conviction just yet, though probabilities are rising.
- The benchmark 10-year US Treasury bond yield trades at 4.03% in European morning trading as the milestone of 4% got broken on Thursday with a peak at 4.08%.
US Dollar Index technical analysis: USD will not see fireworks until NFP
The US Dollar could still close this week off in three possible ways, as the US Dollar Index currently resides right in the middle of this week's price range. It will all come down to the US job report to see whether the US Dollar will appreciate, depreciate or remain steady at current levels. At the moment any gains against most common currencies are rather slim while the losses are rather double as big , which puts the US Dollar Index (DXY) a touch in the red.
On the upside, look for 103.58 as the next key resistance level, which falls in line with Thursday’s high. The 200-day Simple Moving Average (SMA) at 104.73 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 102.82 has proven its importance as it clearly underpinned price action at the end of last week 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.
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