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- US Dollar eases slightly ahead of weekly Jobless Claims
US Dollar eases slightly ahead of weekly Jobless Claims
- The US Dollar falls slightly after a risk-on move overnight.
- Markets will be focused on US data and the ECB rate decision.
- The US Dollar Index holds above 104.00 after paring gains on Wednesday.
The US Dollar (USD) edges lower on Thursday as markets brace for the European Central Bank (ECB) policy decision. The ECB is set to make its first rate cut after its hiking cycle started post-pandemic to tame inflation, with traders looking for clues on what this could mean for the US, the Federal Reserve (Fed) and the Greenback. Normally a rate cut would mean devaluation for the local currency, in this for the Euro, though a 'one-and-done' message could form a knee jerk reaction in the markets and be perceived as very hawkish.
On the economic front, besides the ECB meeting, weekly US Jobless Claims are on the forefront ahead of the Nonfarm Payrolls number on Friday. Traders are having difficulties digesting data from the US that point to diverging conclusions after strong Services Purchasing Managers Index numbers (PMI) on Wednesday defied the downbeat Manufacturing data released on Monday. The Challenger Job Cuts report for May might shed some light on how labor demand is holding up.
Daily digest market movers: All eyes on Lagarde
- The Challenger Job Cuts report for May, to be released at 11:30 GMT, kicks-off the data releases. The previous number was 64,789 layoffs
- At 12:15 GMT, the European Central Bank will release its official rate decision and joint statement. Expectations are near 100% for a 25-basis-point rate cut from 4% to 3.75% for the Deposit Facility rate.
- At 12:30 GMT, while markets are still digesting the ECB rate decision, nearly all US data points for this Thursday will be released:
- Initial Jobless Claims are expected to tick up to 220,000 from 219,000. Continuing Claims should ease a little to 1,790,000 from 1,791,000.
- Goods Trade Balance posted a deficit of $99.4 billion in March. Goods and Services Trade deficit should widen to $76.1 billion in April from $69.4 billion in March.
- Nonfarm Productivity in the first quarter should grow by 0.1%, slower than the 0.3% seen in the previous quarter. Growth in Unit Labor Costs is set to accelerate to 4.9% from 4.7%.
- At 12:45 GMT, ECB President Christine Lagarde will comment on the rate decision. Fresh projections on growth and inflation will be released as well.
- Equities trade in a positive tone, having taken over the risk-on vibe from the US at the closing bell on Wednesday.
- According to the CME Fedwatch Tool, Fed Fund futures pricing data suggests a 31.4% chance for keeping rates unchanged in September, against a 56.8% chance for a 25 basis points (bps) rate cut and a 11.3% chance for an even 50 bps rate cut. An interest rate hike is no longer considered an option. For the upcoming meeting on June 12, futures are fully pricing that rates will remain at current levels.
- The benchmark 10-year US Treasury Note trades around 4.3%, near the fresh monthly low from Wednesday at 4.27%.
US Dollar Index Technical Analysis: For once all on ECB
The US Dollar Index (DXY) is set to move, and the bias is to the downside. The main driver will come from comments from the ECB as – although a rate cut is priced in – this does not mean that substantial US Dollar strength might emerge. Should the ECB remain at its stance of being data dependent and push back against odds for another cut in July or September, markets might push the Euro higher, and therefore see the Greenback devalue further.
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 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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