- US Dollar DXY finds support near 104.00 as sellers appear to take a pause.
- Federal Reserve officials continue to maintain a cautious stance, with a rate cut expected in September.
- Concerns about the US labor market could weigh on the USD.
On Thursday, the American dollar measured by the DXY index The US dollar rebounded, approaching 104.00, despite concerns over the labor market. The rise came as sellers appeared to hit the pause button. Market anticipations of a September rate cut by the Federal Reserve and weakness in the US labor market will be key themes to follow, as they could put additional pressure on the currency.
The US economic outlook shows signs of disinflation, with financial markets expressing confidence in a rate cut in September. Despite this, Federal Reserve officials are showing reluctance to rush into interest rate cuts and are still adhering to a data-dependent approach.
Market Moves Daily Wrap: DXY bounces, rising jobless claims raise alarms about health of US labor market
- U.S. Department of Labor data indicated an increase in jobless claims for the week ending July 13 by 243,000, beating initial predictions of 230,000, and worse than the previous increase of 223,000 (revised from 239,000).
- On a positive note, the Philadelphia Fed Manufacturing Survey for July registered a notably larger improvement than expected, reaching 13.9 after recording 1.3 in June.
- Following the data, moderate bets on the Fed remain stable.
- According to the CME FedWatch tool, a rate cut in September appears to be priced in and limits upside for the USD.
- If the data remains weak, markets could consider a cut at the next meeting in July.
DXY Technical Outlook: Bearish outlook continues, slight upside recovery seems likely
The DXY managed to bounce near the 104.00 area, but the outlook remains bearish with the index below the 20-day, 100-day and 200-day Simple Moving Average (SMA). With daily technical indicators such as the RSI and MACD still languishing below 50, it indicates that the weight of the bearish outlook has not diminished. However, the DXY index could see a minor upward correction in the coming sessions.
Strong support levels remain at 103.50 and 103.00. However, the overall technical outlook continues to favor the bears.
The U.S. dollar
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. As of 2022, it is the most traded currency in the world, accounting for over 88% of all global foreign exchange transactions, equivalent to an average of $6.6 trillion in transactions per day. Following World War II, the USD took over from the British Pound 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: to achieve price stability (control inflation) and to promote full employment. Its main tool for achieving these two goals is to adjust interest rates. When prices rise too quickly and inflation exceeds the Fed’s 2% target, the Fed raises rates, which helps 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 in a jammed financial system. It is an unconventional policy measure used when credit has dried up because banks are not lending to each other (for 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 of 2008. It involves the Fed printing more dollars and using them to buy US government bonds, primarily from financial institutions. QE typically leads to a weakening of the 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 of maturing securities in new purchases. It is generally 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.
