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- US Dollar recovers ahead of ADP release
US Dollar recovers ahead of ADP release
- The US Dollar moves higher against its peers on Wednesday.
- Markets are supporting the Greenback for a second day despite another softer-than-expected JOLTS data on Tuesday.
- The US Dollar Index holds above 104.00 and looks to test nearby upside resistance.
The US Dollar (USD) edges higher for a second day on Wednesday, with the US Dollar Index (DXY), which tracks the Greenback’s value against six major currencies, still negative in the week after Monday’s meltdown. Although the JOLTS Job Openings report for April published on Tuesday showed another decline, even falling below consensus, the fact that the wages element in the report still pointed to a willingness to pay higher salaries is an issue and main driver for the US inflation outlook.
On the economic front, all eyes are on Automatic Data Processing (ADP) and the Institute for Supply Management (ISM). ADP will release its monthly Employment Change ahead of the official US Employment report on Friday, while the ISM will give markets more insights on the Services sector. It is worth noting that the lacklustre performance of the ISM release about the Manufacturing sector was a main driver for the meltdown in the Greenback on Monday.
Daily digest market movers: DXY faces key moment ahead ISM data
- Earlier in the day, the Mortgage Bankers Association (MBA) released its Mortgage Applications number for the last week of May. Data showed a -5.2% concerning the previous week against -5.7% already from the week before.
- The ADP Employment Change data for May will be released at 12:15 GMT. Economists expect a 173,000 increase against the previous reading of 192,000 in April.
- At 13:45 GMT, S&P Global will release its final reading for the Services and Composite Purchasing Managers Index (PMI) for May. Services are expected to remain unchanged at 54.8. The Composite should come in at 54.4, in line with preliminary readings.
- At 14:00 GMT, the ISM releases the Services sector PMI for May:
- Services Employment component was at 45.9 in April, with no forecast available.
- New Orders index was at 52.2 in April.
- Headline Services PMI should jump back into expansion, seen at 50.5, from 49.4 in April.
- Prices Paid index was 59.2 in April, with no forecast available.
- Equities trade mixed on Wednesday, looking for some direction with mild losses or gains, though no real outliers to report in the European trading session.
- According to the CME Fedwatch Tool, Fed Fund futures pricing data suggests a 35.1% chance for keeping rates unchanged in September, against a 55.3% chance for a 25 basis points (bps) rate cut and a 9.6% chance for an even 50 bps rate cut. An interest rate hike is no longer considered an option since this week. For the upcoming meeting on June 12, futures are fully pricing in an unchanged result.
- The benchmark 10-year US Treasury Note trades around 4.35%, near its monthly low at 4.32%.
US Dollar Index Technical Analysis: JOLTS kept a hidden element for Dollar bulls
The US Dollar Index (DXY)tries to recover for a second day all its losses that got booked on Monday. Although the US Dollar weakness looks to be trickling through more and more in the price action, the decline in the JOLTS report held another element that markets did not pick up on immediately. That is, employers, even with fewer job openings than in previous months and weeks, are still willing to pay higher salaries for the right people in the right job, which means that one of the main drivers in US inflation is still alive.
On the upside, the DXY first faces double resistance in the form of the 200-day Simple Moving Average (SMA) at 104.43 and the 100-day SMA at 104.42. Next up, the pivotal level near 104.60 comes into play. For now, the topside is forming around 105.00, with the 55-day SMA coinciding with this round number and the peak from recent weeks at 105.12.
On the downside, the Greenback is trading in that air pocket area in which the 104.00 big figure looks to be holding. Once through there, another decline to 103.50 and even 103.00 are the levels to watch. With the Relative Strength Index (RSI) still not oversold, more downsides are still under consideration.
US Dollar FAQs
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.
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.
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.
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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