US Dollar rallies for second straight day on China outlook,  ECB policy shift

• The US Dollar soars as Moody’s downgrades China credit outlook.
• Traders brace for ISM Services PMI and Jolts data on Tuesday.
• The US Dollar Index jumps to 104.00, snapping crucial resistance levels. 

The US Dollar (USD) appreciates significantly in the European trading session on Tuesday after rating agency Moody’s downgraded China’s credit outlook from stable to negative due to rising debt.  More US Dollar Strength comes from European Central Bank (ECB) member Isabel Schnabel, who said she is surprised by the substantial decline in inflation and no more interest-rate hikes are further needed. 

On the economic front, the calendar is starting to pick up some steam with the Institute for Supply Management (ISM) Services PMI on the wires this Tuesday. Traders will also get to see how healthy the demand for labor is with the US JOLTS job openings data. The S&P Global Purchasing Managers numbers are not expected to move the needle, though any beat on expectations might give the US Dollar more impulse. 

Daily digest: Pressure building to Nonfarm Payrolls

• Rating agency Moody’s has issued a negative outlook for China, a downgrade from the previous “stable” label. 
• European Central Bank (ECB) board member Isabel Schnabel said that she is surprised by the shere speed of decline in inflation in the Eurozone, and no further hikes should be needed. Schnabel is considered to be a hawk, which makes these comments even more important and signals a change in the stance and outlook of the ECB. 
• At 13:55 GMT, the Redbook Index is due to be released. Previous was at 6.3%.
• At 14:45 GMT, the S&P Global Purchasing Managers Indices are expected:
  1. The Services PMI is expected to stay stable from its preliminary reading at 50.8.
  2. The Composite flash reading for November stood at 50.7.
• Chunky batch of data at 15:00 GMT:
  1. The Institute  for Supply Management (ISM) will release its November numbers:
  2. Headline Services PMI for November expected to increase from 51.8 to 52.
  3. Services Employment Index for October was at 50.2. No forecast.
  4. Services New Orders Index for October was at 55.5. No forecast pencilled in.
  5. Services Prices Paid for October was at 58.6. No forecast.
  6. JOLTS Job Openings for October is expected to decline a little from 9.553 million to 9.3 million.
• Equities are bleeding severely this Tuesday with nearly all Asian equity indices down over 1%, with China’s leading indices down more than 2%. European equities are trading in the red, and US futures trade directionless. 
• The CME Group’s FedWatch Tool shows that markets are pricing in a 97.5% chance that the Federal Reserve will keep interest rates unchanged at its meeting next week.  
• The benchmark 10-year US Treasury Note steadies at 4.23%. Yields in Europe, on the other hand, are falling. 

US Dollar Index technical analysis: Back to summer levels

The US Dollar trades around 103.74 and has the next level, 104.00, in sight. Elements like the sudden shift to no-hikes from the ECB widens further the rate differential between the US Dollar and other currencies. In this favourable context,  the US Dollar Index (DXY) is rallying as well. With a few landmark resistances being challenged and broken, more room for Dollar strength is in the pipeline. 

The DXY has performed a daily close on Monday and an opening just above the 200-day Simple Moving Average (SMA), which is near 103.58. The DXY could still make it further up, should employment data trigger rising US yields again. A two-tiered pattern of a daily close lower followed by an opening higher would quickly see the DXY back above 104.28, with the 200-day and 100-day SMA turned over to support levels. 

To the downside, historic levels from August are coming into play, when the Greenback summer rally took place. The lows of June make sense to look for some support, near 101.92, just below 102.00. Should more events take place that initiate further declines in US rates, expect to see a near-full unwind of the 2023 summer rally, heading to 100.82, followed by 100.00 and 99.41.