US Dollar sees mild gains after mixed S&P PMIs and strong Jobless Claims
- The US Dollar Index shows some gains on Thursday, jumping to 104.10.
- February’s S&P PMIs came in mixed, while weekly Jobless Claims came in better than expected.
- Strong labor market figures may push the Fed to remain hawkish.
The US Dollar Index (DXY) saw a slight upswing to 104.10 in Thursday’s session following the release of mixed economic activity data and positive labor market figures.
Meanwhile, the US Federal Reserve continues to adopt a firm approach, showing little interest in reducing interest rates soon and emphasizing the importance of maintaining rates at levels that restrict economic overheating. Market sentiments are increasingly in agreement with this perspective, solidifying the anticipation that any relaxation in monetary policy will be postponed, which may limit the US Dollar’s losses.
Daily digest market movers: The US Dollar holds mild gains as markets digest US data
- The S&P Global Composite PMI in the US decreased to 51.4 in February from 52 in January, indicating a slower expansion of business activity in the private sector.
- S&P Global Manufacturing PMI saw an increase to 51.5 from 50.7, signaling a slight improvement in manufacturing sector growth.
- The Services PMI from S&P Global dropped to 51.3 from 52.5, reflecting a reduction in the pace of expansion within the services sector.
- Initial Jobless Claims for the week ending February 16 came in at 201K, lower than the 218K consensus.
- Market expectation for the next Fed meeting in March suggests that markets are pricing in a hold, while the odds of a cut also remain low for the May meeting.
- Markets are now pushing the start of interest rate easing to June.
Technical analysis: DXY bulls struggle to gain further ground and remain below the 100-day SMA
The indicators on the DXY daily chart reflect a mixed picture. The Relative Strength Index (RSI) exhibits a flat slope yet remains in positive territory This suggests that although the buying momentum has slowed down recently, the overall uptrend has not been completely undermined.
Concurrently, the Moving Average Convergence Divergence (MACD) displays red bars, which is another indication of rising selling momentum. This denotes a possible shift toward a sideways trading phase or even a slight bearish reversal.
In the larger context, the DXY Index is trading above the 20-day Simple Moving Average (SMA) and 200-day SMA but below the 100-day SMA. This highlights that the bulls maintain some dominance, defying recent bearish pressure. However, the Dollar Index’s position under the 100-day SMA signals a potential short-term trepidation among buyers.
Despite the bulls struggling to gain ground, the overall trend appears to still be in favor of buyers, albeit that increasing bearish signals should not be ignored. Hence, the short-term technical outlook seems to be cautiously bullish, with potential periods of consolidation or minor corrections on the horizon.
US Dollar FAQs
What is the US Dollar?
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.
How do the decisions of the Federal Reserve impact the US Dollar?
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.
What is Quantitative Easing and how does it influence the US Dollar?
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.
What is Quantitative Tightening and how does it influence the 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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