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- US Dollar mixed ahead of weekly jobless numbers
US Dollar mixed ahead of weekly jobless numbers
- Traders brace for a second day this week with the weekly jobless numbers.
- Traders are clueless toward Friday’s NFP as ADP and ISM were mixed.
- US Dollar Index sinks below 107, though rally is still intact.
The US Dollar (USD) is turning very mixed this Thursday with several asset classes trying to claw back against the ferocious Greenback. After parts of the equity, commodity and bond markets all reached yearly lows over the past week, it does not come as a surprise that all these elements are up this Thursday. The ADP and Institute of Supply Management (ISM) numbers from Wednesday took a fair bit of wind out of the sales of the US Dollar Index.
While traders are still trying to assess the data releases from Wednesday, already the next batch of data ahead of Friday’s Nonfarm Payrolls are due. With the decline in the ADP Employment Change data, all eyes will be on the Initial Jobless Claims. Should that number be an upbeat surprise, expect to see the DXY start testing the support of the 2023 rally.
Daily digest: US Dollar starts to lose steam
- Near 11:30 GMT, the Challenger Job Cuts for September is due to come out. Previous data was for -75,151. No forecast is pencilled in this time.
- At 12:30 GMT, the only real data points of importance for this Thursday are the Initial Jobless Claims and the Trade Balance. Initial Jobless Claims are expected to head from 204,000 to 210,000. The Continuing Claims are expected to head 1.67 million to 1.675 million. An uptick is thus already expected, though any bigger number might trigger some US Dollar weakness.
- For the Goods Trade Balance, a contraction is expected from -$65 billion to -$62.3 billion.
- Fed speakers might shed some light in this turbulent week with the Fed’s Loretta Mester from Cleveland speaking at 13:00 GMT. At 15:30 GMT, Thomas Barking from Richmond is due to speak, followed by Mary Daly from San Francisco near 16:00 GMT.
- Equities are bored with the constant sell-off and are trying to turn the tide with some green figures: Both the Nikkei and the Topix indices in Japan advanced nearly 2% on Thursday. China is as good as flat for this Thursday. European stocks are flat, and US futures are mildly in the red, less than 0.50%.
- The CME Group FedWatch Tool shows that markets are pricing in a 77% chance that the Federal Reserve will keep interest rates unchanged at its meeting in November. The earlier rise in probability for a hike is being erased again as both ISM and ADP on Wednesday were coming in under expectations and might signal that the economy is starting to struggle with these elevated rates.
- The benchmark 10-year US Treasury yield is peaking at 4.74%, off the highs from 4.85% earlier in the week.
US Dollar Index technical analysis: Failing its first test
The US Dollar Index is under pressure as traders are no longer awarding the Greenback for growing economic indicators when they are contracting against the previous print. Traders are starting to embrace the idea that the extensive growth cycle for the US might be nearing its end and is over its peak. That could translate into a substantially weaker US Dollar Index (DX), which might start to break down as more data points are issued in the coming days and weeks.
The US Dollar Index opened around 106.77, though the overheated Relative Strength Index (RSI) is acting as a cap that it is trading in an overbought regime. With 107.19 – the high of November 30, 2022 – tested on Wednesday, it will be important to see if DXY can get a daily close above that level. If that is the case, 109.30 is the next level to watch.
On the downside, the recent resistance at 105.88 should be seen as first support. Still, that barrier has just been broken to the upside, so it isn’t likely to be strong. Instead, look for 105.12 to do the trick and keep the DXY above 105.00.
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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