- US Dollar recovers after slight losses following ISM PMI data.
- The Dollar finds support in high US Treasury yields.
- Signs of disinflation have begun to emerge in the US economic outlook, which could justify bringing forward the cuts.
At the beginning of the week, the American dollar based on the DXY Index has surpassed the daily losses and currently stands near 105.90, following the recent ISM Manufacturing PMI figures. Sustained levels of rising US Treasury yields continue to give strength to the DXY.
Distinct signs of disinflation are beginning to emerge within the US economic climate, bolstering confidence among market players for a rate cut in September. Federal Reserve (Fed) officials, however, are proceeding cautiously and continue to maintain their data-dependent stance.
Market drivers and daily movements: US dollar recovers despite weak ISM PMIs, all eyes on labor market data
- The ISM manufacturing PMI fell to 48.5 in June from 48.7 in April. This was below the market expectation of 49.1.
- The employment index, part of the PMI survey, also fell to 49.3 from 51.1 in May.
- The new orders index, on the other hand, improved from 45.4 to 49.3.
- The big anticipation of the week is for the June Non-Farm Payrolls which will be released this Friday. According to Bloomberg consensus, it is expected to be 190,000 compared to 272,000 in May.
- Equally important will be Wednesday’s ADP private sector jobs report, which is expected at 158,000 versus 152,000 in May.
- The release of the May FOMC Minutes will provide deeper insight into the Fed’s cautious stance.
DXY Technical Outlook: Persistent Positive Momentum, DXY Eyes Higher Levels
Maintaining a positive outlook, despite minor fluctuations, both the RSI and MACD show stable ground. The RSI continues to hold above 50 with marginal flattening, while the MACD holds its green bar projections, indicating minor traction in the bullish momentum.
Resolutely above its 20-, 100- and 200-day SMAs, the DXY continues to trade at high levels seen since May, with the 106.50 and 106.00 zones in its line of sight. However, observers should also keep an eye on the 105.50 and 105.00 zones in case of potential pullbacks.
The Fed
The monetary policy of the United States is directed by the Federal Reserve (Fed). The Fed has two mandates: achieving price stability and promoting full employment. Your main tool to achieve these objectives is to adjust interest rates. When prices rise too quickly and inflation exceeds the Federal Reserve’s 2% target, it raises interest rates, raising borrowing costs throughout the economy. This translates into a strengthening of the United States Dollar (USD), as it makes the United States a more attractive place for international investors to place their money. When inflation falls below 2% or the unemployment rate is too high, the Federal Reserve can lower interest rates to encourage borrowing, which weighs on the greenback.
The Federal Reserve (Fed) holds eight meetings a year, in which the Federal Open Market Committee (FOMC) evaluates the economic situation and makes monetary policy decisions. The FOMC is made up of twelve Federal Reserve officials: the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the eleven presidents of the regional Reserve banks, who serve for one year on a rotating basis.
In extreme situations, the Federal Reserve can resort to a policy called Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit into a clogged financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis of 2008. It involves the Fed printing more dollars and using them to buy high-quality bonds from financial institutions. QE usually weakens the US dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the capital of maturing bonds in its portfolio to buy new bonds. It is usually positive for the value of 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.
