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- US Dollar rally stalls ahead of key US services sector data
US Dollar rally stalls ahead of key US services sector data
- The US Dollar sees its summer rally stall in European trading on Wednesday.
- Surprise comments from ECB member Knot triggered a surge in EUR.
- The US Dollar Index fades just ahead of nearly reaching 105.00 and could head lower in search of support.
The US Dollar (USD) is losing some steam on Wednesday on hawkish comments from European Central Bank (ECB) member Klaas Knot. The voting ECB member in the upcoming rate decision warned markets that they are underestimating the possibility of another hike from the ECB. This triggered a pop in the Euro and saw the Greenback take a step back.
A very chunky calendar is ahead for Wednesday as data points this week are moving one day later than usual because of the US holiday on Monday. The S&P Global Composite Purchasing Manager Index (PMI) will be important to watch, although this is a final reading with no big surprises expected. Rather look for the Institute for Supply Management (ISM) Services PMI number to come out as the most market moving element for this Wednesday.
Daily digest: US Dollar eases a touch
- The Mortgage Bankers Association (MBA) will issue its Mortgage Applications for the first week of September at 11:00 GMT. Previous print was 2.3%.
- At 12:30 GMT, US Trade Balance numbers for July are expected. The Goods and Services Trade Balance for July is anticipated to post a deficit of $65.8 billion, broadly unchanged from the $65.5 billion deficit registered a month earlier.
- At 13:45, the final reading from the S&P Global Composite and Services PMI for August will be released. Expectations are an unchanged print for both, with the Composite PMI at 50.4 and the Services PMI at 51.0. This would mark a clear divergence from the European PMI numbers published on Tuesday, which showed that services activity in every major EU country was in contraction.
- The most important data point for Wednesday is the publication of New Orders and Services PMI numbers from the Institute for Supply Management (ISM) at 14:00 GMT. The headline Services PMI is expected to shrink a touch from 52.7 to 52.5. The Services Employment Index was at 50.7 in July, with no expectations pencilled in. Similar for the New Orders Index, which stood at 55.0, and the Prices Paid Index, which came in at 56.8.
- Some US Federal Reserve members took the stage as well. Federal Reserve Bank of Boston President Susan Collins will speak at 14:30, while Dallas Fed President Lorie Logan will also speak at 19:00.
- Equities are looking for direction after the small decline seen on t Tuesday. The UK’s FTSE 100 leads declines, down nearly 1%.
- The CME Group FedWatch Tool shows that markets are pricing in a 93% chance that the Federal Reserve will keep interest rates unchanged at its meeting in September.
- The benchmark 10-year US Treasury bond yield trades at 4.26% and keeps heading higher after the US Treasury issued quite a lot of debt paper on Tuesday. The auctions flooded the markets with supply and saw yields ramping up.
US Dollar Index technical analysis: looking for support
The US Dollar eases a touch after its steep climb on Tuesday, when the Greenback was rolling through the markets. The US Dollar Index (DXY) broke lower after some surprise comments from ECB member Klaas Knot which made markets price in again a 50% chance of a rate hike in September, despite the contracting PMI numbers throughout Europe. The Greenback got outpaced by the Euro and saw several other currencies going along for the ride, forcing the DXY to take a small step back.
All eyes are on 105.00 after the DXY nearly reached this level on Tuesday. So only a few cents to go and the DXY will be at a new yearly high for the second time this week. Next levels are at 105.23, the high of March 2022, which would make an 18-month high. If the index reaches this last level, some resistance might kick in.
On the downside, the 104.30 figure is vital to keep the US Dollar Index sustained at these elevated levels. Some room lower, the 200-day Simple Moving Average (SMA) at 103.06 comes into play, which could bring substantially more weakness once the DXY starts trading below it. The double belt of support at 102.42, with both the 100-day and the 55-day SMA, are the last lines of defence before the US Dollar sees substantial and longer-term depreciation.
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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