US Dollar flat in volatile European morning

Source Fxstreet
  • The US Dollar has entered a patch of volatility since the Fed Minutes release.
  • Markets will be chasing PMI’s from several countries throughout the day.
  • The US Dollar Index trades just below 105.00 and could snap above if US PMI surprises.

The US Dollar (USD) is in the red after earlier being in the green when it had gained momentum after the release of the US Federal Reserve (Fed) Minutes overnight, which frightened markets after several concerns were communicated on inflation by Fed officials in the paper. Markets got scared and started to head into safe havens like the Greenback. Although Nvidia earnings pushed the Nasdaq higher, a general wave of Risk On was not rippling through markets where even the Chinese semiconductor index crashed 2% in the Asia-Pacific session. 

On the economic data front, a very packed agenda where markets can again revalue currencies next to each other with both European, United Kingdom’s and US Purchase Manager Index numbers for May. This will give traders a base of comparison and might see these currencies move against each other higher or lower. Besides that, weekly Jobless numbers and some Fed Activity indicators could add fuel to the fire. 

Daily digest market movers: Comparing performances 

  • German Services Purchase Managers Index (PMI) surprised with an upbeat release of 53.9 against 53.2 for April, where 53.5 was expected for May.  The move is particularly supportive for the Euro with Germany being labelled ‘the sick man in Europe’ these past few months.
  • French Services PMI stole a bit of the boost from Germany’s outperformance, because it fell back into contraction from April’s 51.3 to 49.4 against an expected 51.7 for May. 
  • The US data kicks off at 12:30 GMT:
    • Chicago Fed National Activity Index for April will be released. The March number was at 0.15.
    • The weekly Jobless Claims are due to be released:
      • Initial Jobless Claims expected to stay steady from 222,000 to 220,000.
      • Continuing Jobless Claims were last week at 1.794 million, with no forecast pencilled in.
  • The S&P Global preliminary PMI release for May is expected near 13:45 GMT:
    • Manufacturing PMI should remain stable at 50.
    • Services PMI should remain stable as well at 51.3.
    • The Composite should ease a touch from 51.3 in the final April’s reading to 51.1.
  • Near 14:00 GMT, New Home Sales are expected to ease a touch from 0.693 million to 0.680 million for April. 
  • The Kansas Fed Manufacturing Activity for May will come out at 15:00 GMT. The previous number was at -13, no consensus available. 
  • To close off this Thursday, Federal Reserve Bank of Atlanta President Raphael Bostic participates in a Q&A session with students in a MBA macroeconomic class at the Stanford Graduate School of Business near 19:00 GMT.
  • Equities are very mixed with the Hong KongHang Seng down near 2% near its closing bell. The European equities are up near 0.50% while US equities are in the green ahead of the US opening bell.
  • The CME Fedwatch Tool is pricing 95.8% for no change in the policy rate for June. September futures are now seeing a 49.7% chance for a 25-basis-points cut. 
  • The benchmark 10-year US Treasury Note trades around 4.44%, near the high for this week.

US Dollar Index Technical Analysis: Surge in volatility

The US Dollar Index (DXY) attempted to surge towards 105.00, though saw its rally stalling just ahead of the number. The move comes after markets got concerned when reading that several Fed members had issued concerns on current inflation levels in the recent Fed Minutes. Markets were disregarding the fact that these Minutes are already nearly a month old and in the meantime several data elements have proven that disinflation is back on track, which could mean that the DXY is set to ease further from here. 

On the upside, the DXY Index has broken two technical elements which were keeping price action in check on the topside. The first level was the 55-day Simple Moving Average (SMA) at 104.78 and secondly that red descending trend line crossing at 104.79 on Wednesday . From now further up, the following levels to consider are 105.12 and 105.52. 

On the downside, the 100-day SMA around 104.25 is the last man supporting the decline. Once that level snaps, an air pocket is placed between 104.11 and 103.00. Should the US Dollar decline persist, the low of March at 102.35 and the low from December at 100.62 are levels to consider.  

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.

 

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