US Dollar strengthens, strong S&P PMIs data propels rise
- US Dollar soars on back of robust PMI figures for June.
- Markets continue to exercise caution as Fed officials maintain a wary stance on easing cycles.
- Investors continue to leave the door open for a September cut.
On Friday, the US Dollar, benchmarked by the US Dollar Index (DXY), extended its gains, stemming primarily from robust Purchasing Managers Index (PMI) figures for June released by S&P.
Regarding the US economic outlook, there exist signs of some disinflation. Furthermore, Federal Reserve (Fed) officials' cautious comments regarding embracing easing cycles serve to keep market expectations in balance. Should the mixed signals from the economy continue, these could potentially impede any further gains in the USD.
Daily digest market movers: US Dollar rides high on strong PMIs
- US S&P Global Composite PMI for June rose slightly from 54.5 in May to a flash estimate of 54.6, indicating a healthy expansion in business activity within the private sector of the United States.
- Similarly, the S&P Global Manufacturing PMI rose from 51.3 to 51.7 within the same time frame, while Services PMI witnessed an increase to 55.1 from 54.8 in May. This data beat the estimates done by analysts.
- Probability of a rate cut as per CME Group's FedWatch Tool continues to stand around 65% for the meeting on September 18.
DXY technical analysis: Bullish momentum continues, technicals pave the way for more upside
Technical indicators for Friday's session demonstrated renewed bullish momentum backed by robust PMI figures. The Relative Strength Index (RSI) stood above 50, with the Moving Average Convergence Divergence (MACD) presenting green bars, pointing toward sustained bullish sentiment.
Additionally, the DXY Index maintains its footing above the 20-day, 100-day and 200-day Simple Moving Averages (SMAs). Coupled with the rising indicators, the US Dollar seems to be poised for additional gains.
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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