US Dollar rises as market mood sours following US credit rating downgrade

• The US Dollar outperforms its rivals as markets adopt a cautious stance.
• The US Dollar Index stays in positive territory above 102.00 following Tuesday's choppy action.
• USD benefits from souring market mood after Fitch downgraded US credit rating.

The US Dollar gathered strength against its rivals after Tuesday's indecisive trading. The USD Index – which tracks the USD's valuation against a basket of six major currencies – held above 102.00 despite the pullback seen in the American session on Tuesday and stretched higher on Wednesday.

Global rating agency Fitch announced late Tuesday that it downgraded the US government's credit rating to AA+ from AAA, citing anticipated fiscal deterioration over the next three years and a high and growing general government debt burden. This development caused market participants to stay away from risk-sensitive assets, allowing the USD to find demand as a safe haven. 

The US private sector employment rose by 324,000 in July, the data published by Automatic Data Processing (ADP) showed on Wednesday. This reading surpassed the market expectation for an increase of 189,000 and provided further support to the USD. June's figure was revised lower from 497,000 (the highest since February 2022) to 455,000. 

“The economy is doing better than expected and a healthy labor market continues to support household spending,” said Nela Richardson, chief economist, ADP. “We continue to see a slowdown in pay growth without broad-based job loss.”

Daily digest market movers: US Dollar benefits from risk aversion

• 10-year US Treasury bond yield holds steady above 4% following Tuesday's upsurge.
• The number of job openings on the last business day of June stood at 9.58 million, the US Bureau of Labor Statistics (BLS) reported in the Job Openings and Labor Turnover Survey (JOLTS) on Tuesday. This reading followed 9.61 million openings in May and came in slightly below the market expectation of 9.62 million.
• US ISM Manufacturing PMI imrpoved modestly to 46.4 in July from 46 in June. This reading came in below the market expectation of 46.8 and showed an ongoing contraction in the manufacturing sector's business activity.
• The Employment component of the ISM PMI survey declined to 44.4 from 48.1.
• “Banks reported that, on balance, levels of standards are currently on the tighter end of the range for all loan categories. Compared with the July 2022 survey, banks reported tighter levels of standards in every loan category," the Fed said in the July 2023 Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS).
• The ISM reported on Monday that the Chicago PMI improved to 42.8 in July from 41.5 in June. 
• The Federal Reserve Bank of Dallas' Texas Manufacturing Survey revealed that the headline Manufacturing Business Index edged higher to -20 in July from -23.2 in June.
• Inflation in the US, as measured by the change in Personal Consumption Expenditures (PCE) Price Index, fell to 3% on a yearly basis in June from 3.8% in May, the US Bureau of Economic Analysis reported on Friday. This reading came in below the market expectation of 3.1%.
• Core PCE Price Index, the Federal Reserve's preferred gauge of inflation, arrived at 4.1% on a yearly basis, down from 4.6% in May and below the market forecast of 4.2%. Further details of the publication revealed that Personal Income and Personal Spending increased 0.3% and 0.5% on a monthly basis, respectively.
• In an interview with CBS over the weekend, Minneapolis Federal Reserve Bank President Neel Kashkari said that he was not sure whether the Fed was done raising rates. Commenting on the jobs markets, Kashkari noted that it would not surprise him to see the unemployment rate tick up slightly.
• The Fed raised its policy rate by 25 basis points (bps) to the range of 5.25%-5.5% following the July policy meeting as expected. In the post-meeting press conference, Fed Chairman Jerome Powell refrained from confirming another rate hike this year and said that every policy meeting will be live. "If we see inflation coming down credibly, we can move down to a neutral level and then below neutral at some point," Powell told reporters, noting that the policy was already restrictive. 

Technical analysis: US Dollar Index trades near key resistance

The US Dollar Index (DXY) holds above 102.00 (psychological level, static level) and the Relative Strength Index (RSI) indicator on the daily chart edges higher toward 60 on Wednesday, reflecting a buildup of bullish momentum.

DXY faces next resistance at 102.50 (50-day SMA, 100-day SMA). A daily close above the latter could attract buyers and pave the way for an extended uptrend toward 103.00 (psychological level, static level) and 103.70 (200-day Simple Moving Average).

Looking south, sellers could show interest if DXY fails to hold above 102.00. In that case, 101.30 (20-day SMA) could be seen as next bearish target before 101.00 (psychological level, static level) and 100.50 (static level).