US Dollar dips following disappointing S&P PMI figures
- US S&P PMI figures from April came in softer than expected and made markets dump the USD.
- Hawkish bets and high US Treasury yields may limit the downside for the USD.
- All eyes are set on PCE and GDP data on Thursday and Friday.
The US Dollar Index (DXY) is trading softly at 105.70 tallying daily losses on Tuesday's session. The Federal Reserve (Fed) has been sending a consistently hawkish message, which might limit the Greenback’s losses as markets delay the start of the easing cycle. Investors are also keeping an eye on vital economic reports due this week, including the preliminary figures of Q1’s Gross Domestic Product (GDP) Growth Rate and the Personal Consumption Expenditures (PCE) Price Index from March to gain further insight into the economy's health. During Tuesday’s session, S&P PMIs came in lower than expected and made the USD face selling pressure.
Despite the weak PMIs, the US economy exhibits overall resilience. The Fed's stance leans hawkish, manifesting itself in reduced odds of rate cuts in the near future and not until September. PCE and GDP data later this week will likely fuel volatility in markets as they will continue shaping the expectation on the next Fed decisions.
Daily digest market movers: DXY declines following weak April S&P PMIs, hawkish bets on Fed
- The S&P Global Composite Purchasing Managers Index (PMI) fell to 50.9 in April's flash estimate, indicating slower private sector growth in the US from March's 52.1.
- The S&P Global Manufacturing PMI demonstrated a more noticeable drop from March's 51.9 to 49.9 in April, suggesting a contraction in US manufacturing sector activity.
- Similarly, April's S&P Global Services PMI decreased from 51.7 to 50.9.
- Following the consistent hawkish stance from the Federal Reserve (Fed) on US monetary policy, the first rate cut was pushed to September, but it isn't fully priced in.
- US Treasury bond yields are dwindling with the 2-year yield at 4.93%, 5-year yield at 4.61%, and 10-year yield at 4.58%.
DXY technical analysis: DXY displays a declining momentum, overall bullish outlook holds
The indicators on the daily chart reflect contrasting outlooks. The Relative Strength Index (RSI) is on a negative slope albeit in positive territory, indicating a possible slowdown in buying momentum as the indicator slopes downwards. However, it is crucial not to overlook that it still remains in the bulls' region, suggesting some continued bullish strength. Simultaneously, the Moving Average Convergence Divergence (MACD) shows decreasing green bars, also indicating a loss of bullish momentum as the magnitude of buyers seems to be dipping. This is a warning bell for the bulls, suggesting that they might be gradually losing ground.
Regarding the Simple Moving Averages (SMAs), they manifest a more bullish image. Despite a negative short-term outlook, the DXY is above the 20, 100, and 200-day SMAs, signifying a more positive medium to long-term perspective. It suggests that bulls still retain control in the larger picture, providing hope for a potential recovery of bullish momentum.
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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