US Dollar declines after weak economic data and neutral Fed outlook
- US job openings for July arrived at 7.67 million, weaker than expected.
- Fed Beige Book notes modest price increases and slight economic growth.
- Markets remain overconfident on a super-dovish Fed.
The US Dollar Index (DXY), a measure of the USD against a basket of six currencies, snapped its recovery streak on Wednesday after a disappointing report on US job openings and a mixed outlook from the Federal Reserve's (Fed) Beige Book.
Overall, the US economy remains in a state of expansion, surpassing its expected growth rate, but the soft tone of the labor market gives the market reason to bet on a dovish Fed.
Daily digest market movers: US Dollar declines on weak JOLTS data and mixed Fed outlook
- US job openings decreased to 7.67 million at the end of July, missing market expectations.
- Fed's Beige Book indicated modest price increases and uneven economic growth.
- Economic activity improved or remained stable in most Fed districts with some anticipating slight declines.
- Price pressures are expected to moderate, but economic activity remains mixed.
- Market expectations for Fed easing remain steady at 100 basis points by year-end and 200 basis points over the next 12 months.
- The probability of a 50 bps cut in September stands around 30-35%.
- Friday's Nonfarm Payrolls will dictate the pace of Fed cuts and USD dynamics.
DXY technical outlook: DXY remains bearish, encountering resistance at 102.00.
The index recently rallied but encountered resistance at the 20-day Simple Moving Average (SMA), leading to a selling frenzy. The Relative Strength Index (RSI) is in negative territory, indicating bearish momentum. The Moving Average Convergence Divergence (MACD) remains on negative terrain, reinforcing the downtrend.
Supports are located at 101.30, 101.15 and 101.00, while resistances lie at 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.