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- US Dollar under pressure ahead of NFP report
US Dollar under pressure ahead of NFP report
- The US Dollar retreats for a fourth straight day this week.
- Newswires are swamped with UK and French election news ahead of the US Employment Report.
- The US Dollar index briefly falls below 105.00 at the start of the European session.
The US Dollar (USD) dips again on Friday, painting red numbers across the board for the US Dollar against most major currencies. The main adversaries that stand out are the Swiss Franc (CHF) and the Japanese Yen (JPY), which are gaining against the Greenback. The move is evermore strange with European equities in the green at the opening bell, which could point at traders reducing their Greenback exposure ahead of the US Jobs Report.
On the US economic front, there is only one topic on the bulletin board on Friday: The US Employment report for June. The anticipations are ever high, with the lowest estimate at 140,000 against 237,000 on the upside. Any number thus below 140,000 could trigger a quite voluminous reaction in the Greenback, as the jobs market is being seen as the last man standing in an environment where all other US economic indicators are starting to soften or turn lower.
Daily digest market movers: Last man standing
- The Labour Party won a landslide victory in the UK, and Keir Starmer is on track to become the next resident at 10 Downing Street. This result is increasingly strange, given the moves to the right in Europe.
- Ahead of Sunday’s election in France, the far-right National Rally party of Marine Le Pen is no longer in the position to gain a majority, according to recent polls.
- At 12:30 GMT, the US Employment Report for June will be released:
- Nonfarm Payrolls is expected to decline to 190,000 from 272,000, with the lowest estimate at 140,000 and the highest at 237,000.
- Average Hourly Earnings are seen increasing by 0.3% in June compared with 0.4% in May.
- Unemployment Rate is expected to remain stable at 4%.
- Expect severe market reactions should the Nonfarm Payrolls number come in substantially below the lowest estimation (weaker USD) or jump above the highest (stronger USD).
- At 15:00 GMT, the Fed’s Monetary Policy Report will be released. This report is submitted semiannually to the Senate Committee on Banking, Housing, and Urban Affairs and to the House Committee on Financial Services.
- Asian stocks were unable to close the week on a high note and saw both China and Japan close negative. European equities are doing well on the back of the UK outcome and are jumping higher. The UK FTSE 100 was even up 1% at one given point before falling back to flat ahead of the US session.
- The CME Fedwatch Tool is broadly backing a rate cut in September despite recent comments from Fed officials. The odds now stand at 66.5% for a 25-basis-point cut. A rate pause stands at a 27.4% chance, while a 50-basis-point rate cut has a slim 6.1% possibility.
- The US 10-year benchmark rate trades at 4.35%, near its weekly low.
US Dollar Index Technical Analysis: Traders shun away
The US Dollar Index (DXY) falls to fresh weekly lows and tests the magic 105.00 level on Friday. In the runup to the US Nonfarm Payrolls release, traders seem to be reducing their Greenback exposure as the markets survey numbers have pencilled in high expectations for June. This could be seen as a sign that it could all end in tears, and the DXY could fall to 104.44 in a nosedive correction when the US labour market is turning softer and joins other recent US data.
On the upside, the 55-day Simple Moving Average (SMA) at 105.20 has now turned into resistance after an early test during the Asian session received a firm rejection and pushed the DXY further down again to test that 105.00 level. Should that 55-day SMA be reclaimed again, 105.53 and 105.89 are the next nearby pivotal levels. In case the Nonfarm Payrolls report was utterly strong, the red descending trend line in the chart around 106.23 and April’s peak at 106.52 could come into play.
On the downside, the risk of a nosedive move is increasing, with double support at 104.77, the confluence of the 100-day SMA and that green ascending trend line from December 2023. Should that double layer give way, the 200-day SMA at 104.44 is the gatekeeper that should catch the DXY and avoid any further declines, which could head to 104.00 as an initial stage in the correction.
US Dollar Index: Daily Chart
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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