- The US dollar retreated after posting solid gains in recent weeks.
- Nonfarm payrolls increased by 12,000 in October, falling short of market expectations.
- Markets are still almost fully pricing in a 25 bp cut by the Fed next week.
The US Dollar Index (DXY), which measures the value of the USD against a basket of six currencies, rebounded intraday despite weak employment data, as annual wage inflation rose to 4%, indicating that Inflationary pressures remain high. Meanwhile, markets are still almost fully expecting a 25 basis point cut from the Federal Reserve (Fed) next week. On the data front, ISM PMIs also showed mixed results in September.
The DXY continues to trade sideways near 104.00. Despite persistent inflation, weak employment growth data raises expectations of a less hawkish stance from the Fed, which could begin to weaken the USD.
Market Drivers: US Dollar Rebounds After Nonfarm Payrolls
- US nonfarm payrolls increased by just 12,000 in October, significantly below market expectations of 113,000.
- The unemployment rate remained unchanged at 4.1%, in line with expectations.
- Wage inflation, measured by average hourly earnings, rose to 4% from 3.9%.
- Business activity in the US manufacturing sector continued to contract at a faster pace in October, with the ISM Manufacturing PMI falling to 46.5 from 47.2 in September. This figure was below the market expectation of 47.6.
- The services PMI rose to 54.9 in October, indicating strong expansion in the US services sector.
- Markets are pricing in a 25bp cut by the Fed next week and an 85% chance of another 25bp cut in December.
DXY Technical Outlook: DXY consolidates, finds support at 200-day SMA
The index retested the 200-day Simple Moving Average (SMA) support at 104.15 and buyers successfully defended it. The Relative Strength Index (RSI) is pointing down, still near overbought territory, and the Moving Average Convergence/Divergence (MACD) indicator is printing lower green bars, indicating bearish momentum. In that sense, if buyers show resistance, it could present better opportunities around the aforementioned SMA.
Key support levels include 104.15, 104.05 and 104.00, while resistance lies at 104.70, 104.90 and 105.00. Traders monitor these levels closely for breakout opportunities.
The US Dollar FAQs
The United States 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 in circulation alongside local banknotes. According to 2022 data, it is the most traded currency in the world, with more than 88% of all global currency exchange operations, equivalent to an average of $6.6 trillion in daily transactions. After World War II, the USD took over from the pound sterling as the world’s reserve currency.
The single most important factor influencing the value of the US Dollar is monetary policy, which is determined by the Federal Reserve (Fed). The Fed has two mandates: achieve price stability (control inflation) and promote full employment. Your main tool to achieve these two objectives is to adjust interest rates. When prices rise too quickly and inflation exceeds the 2% target set by the Fed, the Fed raises rates, which favors the price of the dollar. When Inflation falls below 2% or the unemployment rate is too high, the Fed can lower interest rates, which weighs on the 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 into a clogged financial system. This is an unconventional policy measure used when credit has dried up because banks do not lend to each other (for fear of counterparty default). It is a last resort when a simple lowering of 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 of 2008. It involves the Fed printing more dollars and using them to buy US government bonds, primarily from financial institutions. QE usually leads to a weakening of the US Dollar.
Quantitative tightening (QT) is the reverse process by which the Federal Reserve stops purchasing bonds from financial institutions and does not reinvest the principal of maturing portfolio securities in new purchases. It is usually positive for the US dollar.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
