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    US Dollar trims losses after strong labor market data

    Source Fxstreet
    Jan 4, 2024 17:59
    • The DXY Index recovered from a daily low of around 102.20 to trade flat on the day.
    • ADP Employment Change figures from December came in better than expected. Weekly Jobless Claims were also positive.
    • Weak S&P Global PMI data may limit the upside for the USD.
    • Dovish bets on the Federal Reserve (Fed) eased somewhat but are still high. 

    The US Dollar (USD) gained traction during the American session, with the Dollar Index (DXY) trading at 102.45 after an initial dip to 102.20. That trend was primarily driven by favorable ADP Employment Change for December and Initial Jobless Claims figures, which added traction to the Greenback's daily movements. 

    With the Fed's recent judgment over the easing of inflation, there's a perception of a dovish stance as officials anticipated no rate hikes in 2024 with a possible easing of 75 bps. Current market bets suggest that investors are seeing higher odds of cuts in March and May, but those bets eased somewhat in the last sessions, which gave the US Dollar traction.  Upcoming December labor market reports could shift expectations. 

    Daily digest market movers: US Dollar strengthens on strong labor market figures

    • US Initial Jobless Claims were reported lower than expected at 202K vs the consensus of 216K for the week ending on December 30. 
    • The ADP Employment Change, which is a gauge of employment in the private sector, overshot estimates, coming in at 164K in December vs the 115K expected.
    • The S&P Global Composite PMI from December came in at 50.9, lower than the 51.00 expected.
    • On Friday, Nonfarm Payrolls, Average Hourly Earnings, and the Unemployment Rate for the last month of 2023 will be closely watched.
    • The US bond yields are edging upwards. The 2-year yield is at 4.38%, the 5-year yield is at 3.97%, and the 10-year yield is at 4.00%.
    • CME FedWatch Tool shows that markets have priced in a hold in the upcoming January meeting with 15% odds of a rate cut. However, markets are pricing higher odds of rate cuts in March and May 2024.

    Technical Analysis: DXY bulls hold momentum but still have some work to do

    The indicators on the daily chart reflect that DXY bulls are gaining ground. The positive slope and positive territory positioning of the Relative Strength Index (RSI) suggest that buying momentum is prevailing. Further backing this is the Moving Average Convergence Divergence (MACD) showing green bars on the rise, which further underscores the growing strength in the buyers' camp. 

    In contrast, the index's positioning with regard to the Simple Moving Averages (SMAs) offers a mixed outlook. The index stays above the 20-day SMA, highlighting the short-term buying momentum, but it is still below both the 100 and 200-day SMAs. This indicates that bears are trying to maintain a foothold in larger time frames. Still, their hold appears to be weakening, especially in the short term. 

    Therefore, while the long-term trend might favor bears, the short-term analysis indicates stronger upside momentum steered by the bullish camp — with both the RSI and MACD affirming this assertion.

    Support levels: 102.20 (20-day SMA),102.00, 101.50.
    Resistance levels: 102.70, 102.90, 103.00.



    US Dollar FAQs

    What is the US Dollar?

    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.

    How do the decisions of the Federal Reserve impact the US Dollar?

    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.

    What is Quantitative Easing and how does it influence the US Dollar?

    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.

    What is Quantitative Tightening and how does it influence the 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.

    Disclaimer: For information purposes only. Past performance is not indicative of future results.
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