- US Dollar weakened on Thursday after mixed US economic data.
- S&P Global Services PMI and ISM Services PMI showed expansion in the service sector.
- Labor data showed some signs of weaknesses.
On Thursday, the US Dollar Index (DXY), a measure of the USD against a basket of six currencies experienced volatility following the release of mixed economic data from the United States. Labor data showed weakness in the sector, while Services figures were strong.
With the US economic outlook mixed, signs of cooling in the labor market are making investors put some bets on a larger cut in September.
Daily digest market movers: US Dollar stands weak after labor figures, steady dovish bets
- ADP Employment Change missed estimates, falling to 99,000 from 122,000, while the prior month was revised down to 111,000.
- Initial Claims came in at 227,000 from 232,000 previously, while Continuing Claims fell from 1.860 million to 1.838 million.
- In addition, Nonfarm Productivity saw a small uptick to 2.5% from 2.3%, while Labor Cost fell from 0.9% to 0.4%.
- S&P Global’s Services PMI rose from 55.2 to 55.7, and the Composite PMI increased from 54.1 to 54.6. The ISM’s Services PMI improved slightly from 51.4 to 51.5.
- Contributing to the cooling labor market, the Employment Index in the ISM Services PMI declined from 51.1 to 50.2.
- Following the data, the CME Fedwatch Tool indicates a 55% chance of a 25 bps rate cut in September and a 45% chance of a 50 bps cut, with further cuts expected thereafter.
DXY technical outlook: Technicals suggest continued bearish momentum, testing support at 100.50
The DXY index’s technical indicators have resumed their downward trajectory and remain in negative territory. Despite a recent recovery attempt, the index encountered resistance at its 20-day Simple Moving Average (SMA), resulting in a rejection of buyers.
As a result, the DXY is poised to revisit the 100.50 (August lows) support level. Above, support levels include 101.30, 101.15, and 101.00, while resistance levels are located at 101.80, 102.00, and 102.30.
Indicators-wise, the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) continue to suggest bearish momentum as they are still in negative terrain.
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Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named 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 during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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