- US Dollar price action is mixed, with no real outliers.
- Traders face an eventful week with the monthly US jobs report on Friday.
- The US Dollar Index clings on to 104.00, though some selling pressure persists.
The US Dollar (USD) was not making big waves at the start of the week on Monday. With the United Kingdom closed for a bank holiday, the typically lower volume at the start of the week was even more slim, bringing no real substantial moves to notice. With the UK back online and more economic data on the docket, trading volumes are expected to pick up again to more normal levels.
The datafront is starting to come into play with some second-tier data points on Tuesday. The JOLTS Job Openings report will be the one to make the most waves as a decline in job openings could point to a contraction of demand in the labor Market, which means that wages could start to flatline or even to take a step back and in its turn dampen inflationary pressures. Expectations are for a drop from 9.582 million to 9.465 million for July.
Daily digest: US Dollar first jobs-related datapoint
- The data calendar starts at 12:55 GMT with the Redbook Index.. Previous number was a 2.9% increase, with no forecast pencilled in.
- The Housing Price Index for June is due to come out at 13:00 GMT. Expectations are for a slowdown, from 0.7% in May to 0.2% for June. Additionally, the Case-Shiller Home Price Index for the year will be released as well. Market expectations are for a 1.3% contraction in house prices for June, less than the 1.7% drop seen in May.
- The major macroeconomic datapoints for Tuesday, with the potential to move markets, are at 14:00 GMT. One is the Conference Board Consumer Confidence indicator for August, which is set to remain broadly steady from its previous 117 to 116. The second one, is the JOLTS Job Openings survey for July, expected to head lower from 9.582M to 9.465M.
- Later this Tuesday, the US Treasury will be tapping the markets for a 7-year Note Auction.
- Jackson Hole is water under the bridge, with equities across the globe rallying firmly. The Japanese Topix is up 0.16%, while the Chinese Hang Seng is up 1.93%. European equities are rallying as well, with the FTSE 100 in London recording a 1.26% gain. US equity futures are mildly in the green.
- The CME Group’s FedWatch Tool shows that markets are pricing in a 78.5% chance that the Federal Reserve will keep interest rates unchanged at its meeting in September. Although it still looks like a given that the Fed will not hike, markets are starting to second-guess a little more (21.5%) if the Fed would not surprise markets with still a last quarter-point-hike.
- The benchmark 10-year US Treasury bond yield trades at 4.18% after touching a new yearly high last week on Monday at 4.3618%. Investors are starting to buy into bonds, which is putting pressure on the yields to slide lower.
US Dollar Index technical analysis: water under the bridge
The US Dollar has been in a firm rally since mid-July, shooting for the stars particularly last week. With the Jackson Hole event out of the way, the US Dollar rally could start to slow down a touch. Some profit taking could get underway this week with the several US jobs-related data this week that are due to come out. Furthermore, a risk on mood in markets could see less appetite for the Greenback, which is considered as a safe-haven.
On the upside, 104.69, the high of May 31, comes into play as the level to beat. Once that level is broken and consolidated, look for a surge to 105.00, where 105.10 (the peak of March 15) is an ideal candidate for a double top. Should the Greenback be on a tear, expect a test at 105.88 – the 2023 peak from March 8.
On the downside, several floors are likely to prevent a steep decline in the DXY. The first one is the big figure at 104.00. Though seeing the current decline, that does not look strong enough to hold. Rather look for the 200-day Simple Moving Average (SMA) at 103.14. That is a much better candidate in order to catch some profit-taking pressure and re-enter. In case it does not hold, the safety net at 102.33 comes into play, holding both the 55-day SMA and the 100-day SMA.
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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