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- US Dollar trades lower as markets adjust dovish bets on the Fed post NFP, ISM PMIs
US Dollar trades lower as markets adjust dovish bets on the Fed post NFP, ISM PMIs
- DXY Index retreats after the latest string of US data, holds onto weekly gains
- United States NFP from December were higher than expected, as well as Average Hourly Earnings, while Unemployment Rate stood at 3.7%.
- The Services ISM PMI from the same month disappointed.
The US Dollar (USD), represented by the Dollar Index, is currently trading just above 102.00, showing a downtick of 0.30% due to the markets adjusting dovish bets post the release of December’s Nonfarm Payrolls (NFP) and the ISM PMIs.
From indications in the last 2023 Federal Reserve meeting, a dovish stance was apparent. The Fed expressed comfort with cooling inflation and projected no rate hikes until 2024, suggesting 75 bps of easing. As for now, market predictions hint towards a rate cut in March followed by another in May, and such a position signals a bearish climate for the US Dollar, as lower interest rates might drive liquid capital to higher yield markets.
Daily digest market movers: US Dollar under downward pressure despite strong NFP, ISM PMI weighs
- The ISM Services PMI for December came in at 50.6, missing the consensus of 52.6 and lower than the previous figure of 52.7.
- December's Average Hourly Earnings saw a monthly increase of 0.4%, outpacing the consensus of 0.3% and matching the previous figure.
- December Unemployment Rate remained steady at 3.7%, lower than the 3.8% expected.
- The Nonfarm Payrolls report surpassed expectations with the addition of 216,000 jobs, beating the 170,000 job consensus and the previous 173,000 figure.
- Despite the strong labor figures, markets seem to be weighting in more poor ISM figures and rushed to bet on a less aggressive Fed.
- Fed predictions suggest no hike is anticipated for the January meeting, with only a 15% probability of a rate cut. The market consensus now points toward the likelihood of rate cuts in both March and May of 2024, with the odds of the easing cycle starting in the third month at 70%.
Technical Analysis: DXY index seller’s momentum resumes as bulls give up
The Relative Strength Index (RSI) is charting a negative slope in the negative territory, suggesting a bearish trend prevalent in the DXY. Selling momentum seems to have a stronger hold, reflecting the downward drift of the RSI.
The Moving Average Convergence Divergence (MACD) is showing rising red bars, implying that negative momentum is gradually escalating, further reinforcing the bearish outlook.
In regards to the Simple Moving Averages (SMAs), the index is struggling around the 20-day SMA and is still below the longer-term 100, and 200-day SMAs. indicating that on the broader context, the sellers are comfortably in command.
In conclusion, the indicators on the daily chart reflect a dominant bearish force in the short term, amplified by the repeated indication of the bulls losing ground and failing to hold the traction gained in the last session. This suggests there may be more downward movements on the horizon.
Support levels: 101.80, 101.70, 101.50.
Resistance levels: 102.15 (20-day SMA), 102.50, 103.00.
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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