US Dollar in upswing following robust S&P PMIs, positive Jobless Claims data
- May’s PMI and weekly Jobless Claims data outperformed expectations and provided the USD with a lift.
- The USD is also registering gains following Wednesday’s relatively hawkish FOMC minutes.
- The odds of a cut in September continue to decline.
The US Dollar Index (DXY) is currently trading at 104.90, modestly higher, and managed to clear all its daily losses. This upward trajectory is driven by robust S&P surveys known as the Purchasing Managers Index (PMI) and encouraging weekly Jobless Claims figures, both indicative of a healthier US economy.
The US economy displays strength, and the Fed's cautious approach keeps the Greenback afloat. Next week’s US Personal Consumption Expenditures (PCE) figures for April will determine the short-term trajectory.
Daily digest market movers: DXY strengthens on upbeat PMI data
- S&P Global Manufacturing PMI for the US increased to 50.9 in May, up on a monthly basis from 50.0 in April, surpassing economists' forecast of 50.0.
- Service sector PMI rose to 54.8 from 51.3 in the previous month, exceeding the prediction of 51.3 on a monthly basis.
- Composite PMI for May was reported at 54.4, a significant leap on a monthly basis from 51.3 in April, and surpassed the anticipated decline to 51.1.
- US Department of Labor reports 215K employment insurance beneficiaries in the week ending May 18, lower than the estimated 220K and the prior week's figure of 223K, implying a resilient labor market.
- Fed maintains a reserved approach toward monetary policy alterations while advocating for continued patience before starting cutting.
- Odds of a cut in the September meeting declined below 40%, according to the CME FedWatch Tool.
DXY technical analysis: DXY faces a conflicting medium-term outlook as bears and bulls tussle for dominance
The indicators on the daily chart reflect a sort of stalemate between bullish and bearish perspectives. Despite the bears working to gain ground, the index remains above the 100 and 200-day Simple Moving Averages (SMAs), a strong testament to the presence and resiliency of buying momentum. However, the Relative Strength Index (RSI) flirting with negative territory suggests that a bearish pinch may be on the way.
Moreover, the Moving Average Convergence Divergence (MACD) presents flat red bars, a neutral to bearish sign that could indicate a potential shift in momentum or continued sideways movement.
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.
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