US Dollar consolidates ahead of labor market data
- US Dollar takes a breather after last week's rally.
- August jobs report on Friday is anticipated to show a significant increase in Nonfarm Payrolls.
- Market expectations for 100 bps of easing from the Fed by year-end remain unchanged.
On Monday, the US Dollar Index (DXY), which measures the US Dollar’s value against a basket of six major currencies, consolidated above 101.50, extending after last week's gain of more than 1%. Markets await key labor data this week, and the August jobs report, due for release on Friday, is anticipated to show a robust increase in Nonfarm Payrolls (NFP), which might provide support to the US Dollar.
Despite ongoing economic growth that exceeds expectations, the market's anticipation of aggressive monetary easing appears to have become excessive. However, a cut by the Federal Reserve (Fed) in September is a done deal, but its size will depend on the incoming data.
Daily digest market movers: DXY flat on quiet Monday ahead of key data
- Consensus estimates for August's Nonfarm Payrolls is 165K, with a whisper number of 150K.
- Unemployment Rate is expected to fall to 4.2%, while Average Hourly Earnings are expected to rise to 3.7%.
- Other data this week, including ISM manufacturing and services PMIs, are expected to decline slightly but remain in expansionary territory.
- Moreover, the Fed's Beige Book report is expected to show that the labor market remains tight.
- Dovish bets on the Fed remain steady, and investors are still seeing 100 bps of cuts by year-end.
DXY technical outlook: Index consolidates after last week's rally, DXY must hold 101.50 line
The DXY Index experienced a consolidation phase after last week's rally, which resulted in weekly gains of nearly 1%. Currently, the Relative Strength Index (RSI) is below 50, while the Moving Average Convergence Divergence (MACD) is displaying rising green bars, indicating a potential bullish trend. Both indicators point to bullish momentum flattening out but recovering overall.
The key support levels for the DXY are 101.50, 101.30 and 101.00, while the resistance levels are 101.80, 102.00 and 102.30.
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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