US Dollar extends gains and aims for a third consecutive positive week

Source Fxstreet
  • The US Dollar trades firmly higher for the week after late price action. 
  • Markets will focus on the  US S&P Global PMI data for June on Friday. 
  • The US Dollar index trades in the green and could lock in a third consecutive week of gains. 

The US Dollar (USD) continued edging higher on Friday ahead of the preliminary US S&P Global Purchasing Managers Index (PMI) report for June. The US Dollar shot higher in the last hours, with the Greenback outpacing the Japanese Yen (JPY) again, hitting 159.00 at USD/JPY, whilst tech wale Nvidia dove over 3% and lost $91 billion at the US closing bell. 

On the economic data front, earlier in the day, S&P Global and Hamburg Commercial Bank (HCOB) released the Eurozone PMI data for June, showing lower-than-expected numbers. Manufacturing data further deepened into contraction at 45.6, while the services sector index fell to 52.6 from 53.2 in May. On the US side, traders will especially focus on the services component, as it accounts for two-thirds of the economy. Expectations for the US S&P Global Services PMI range from 55.00 to 52.00, with the previous month’s number at 54.8. 

Daily digest market movers: Asia moving markets

  • Masato Kanda, vice-minister for international affairs at Japan's Ministry of Finance, said that Japan is ready to take proper action on FX when needed. This comment sent the US Dollar back up to 159 against the Japanese Yen.
  • Preliminary S&P Global/HCOB PMI data for France, Germany, and the Eurozone showed worst-than-expected numbers. As a result, the Euro retreats further against the US Dollar, falling below 1.07.
  • At 13:45 GMT, S&P Global will release the June’s PMI preliminary reading per sector:
    • Services sector is expected to ease to 53.7 from 54.8 in May.
    • Manufacturing should remain rather stable, t showing 51.00 in June from 51.3 the previous month.
    • The Composite Index was at 54.5 in May, with no consensus view available. 
  • At 14:00 GMT, in the slipstream of the US PMI release, Existing Home Sales data for May will be released. The expected number is 4.10 million in May, down from the 4.14 million seen in April. 
  • Equities are still trying to recover from the massive punch they received from the $91 billion value evaporating in Nvidia. There are red numbers across the board and across the globe for all major indices. 
  • The CME Fedwatch futures for September are backing a rate cut, with odds now standing at 57.9% for a 25 basis point cut. A rate pause stands at a 35.9% chance, while a 50-basis-point rate cut has a slim 6.2% possibility. 
  • The US 10-year benchmark rate is trading at 4.24%, right in the middle of this week’s range after briefly hitting 4.29% on Thursday. 

US Dollar Index Technical Analysis: Gaining while not doing anything

The US Dollar Index (DXY) is breaking higher and has good odds to lock in a third consecutive week of gains. Although refraining from any soccer analogies, looking at the chart, it is quite clear that the Greenback has not played a good game this week. However, what counts is the end result, and that looks to be a win for the Greenback with a big thank you to the weaker Japanese Yen, France’s political turmoil, and the further contracting PMIs in Europe as main drivers. 

On the upside, there are no big changes to the levels traders need to watch out for. The first level to watch is 105.88, which triggered a rejection at the start of May and will likely play its role as resistance again. Further up, the biggest challenge remains at 106.51, the year-to-date high from April 16. 

On the downside, that 105.52 level is first support ahead of the trifecta of Simple Moving Averages (SMA) is still playing as support. First is the 55-day SMA at 105.14, safeguarding the 105.00 figure. A touch lower, near 104.61 and 104.48, both the 100-day and the 200-day SMA are forming a double layer of protection to support any declines. Should this area be broken, look for 104.00 to salvage the situation. 

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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