US Dollar drifts lower for fourth straight day with all eyes on PCE inflation report
- The US Dollar is losing steam ahead of the release of the US PCE Price Index report.
- A moderately hawkish BoJ Governor Kazuo Ueda and better-than-expected Eurozone GDP figures have weighed on the USD.
- Failure to break the 104.55 resistance has brought 103.90 support into focus.
The US Dollar Index (DXY) edges down on Thursday, extending the mild losses seen over the last four sessions. Still, the US Dollar (USD) remains near three-month highs and is on track to close its best monthly performance in more than two years.
US macroeconomic data continues endorsing the rhetoric of a strong economy in a period of global slowdown, which gives the USD a competitive advantage against the rest of the major currencies.
The ADP employment report beat expectations on Wednesday, easing concerns about a deterioration of the labour market and improving investors’ expectations about Friday’s Nonfarm Payrolls (NFP) report.
Daily digest market movers: The US Dollar is lacking momentum ahead of key releases
- Eurozone Consumer Prices Index (CPI) data for October has revealed higher-than-expected inflationary pressures, following a positive surprise in the Q3 GDP. These data dampen hopes of aggressive interest-rate cuts by the ECB, supporting the Euro (EUR).
- The Bank of Japan (BoJ) kept interest rates unchanged on Thursday but Governor Kazuo Ueda signaled further monetary normalization if conditions are met. This has given some oxygen to a battered Japanese Yen (JPY), adding pressure to the USD.
- The US ADP Employment showed a 233K increase in private-sector payrolls in October, well above the 115K expected. September's reading was revised up to 159K from 143K.
- Q3 US Gross Domestic Product data, also released on Wednesday, missed estimates with a 2.8% annualized growth. The figures fell short of the 3% expected but they are still consistent with a solid economy.
- Wednesday’s data bolstered the case for gradual easing by the Federal Reserve (Fed) but did not add anything new to significantly alter the outlook about the future path of interest rates. The immediate positive impact on the Dollar faded shortly afterward.
- The Personal Consumption Expenditures (PCE) Price Index, the Fed’s inflation data of choice, is expected to show that price pressures continued to ease, with the core reading down to 2.6% yearly from 2.7% in September. The data will be published at 12:30 GMT.
- The main attraction will be Friday’s Nonfarm Payrolls (NFP) report, which is expected to show a significant decline in new payrolls. If these figures are confirmed, the US Dollar could correct further.
DXY technical outlook: Approaching support area at 103.90
The DXY index maintains its bullish bias intact but failure to break the resistance area above 104.55 has increased the bearish pressure, sending prices to test the bottom of the recent range at 103.90.
The 4-hour Relative Strength Index (RSI) shows a bearish divergence, and price action has crossed below the 50-period Simple Moving Average (SMA). These are negative signs. Further depreciation below 103.90 would confirm a deeper correction and bring 103.40 into focus. Resistances remain at at the 104.55-104.75 area and 105.20.
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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