- US Dollar price action turns ugly after a miss on GDP print.
- The already lower ADP job number will build up more selling pressure on the Greenback towards the US jobs report on Friday.
- The US Dollar Index dropped below 104.00 and might retrace even further to 103.00.
The US Dollar (USD) is nearly crashing against nearly every major G10 peer, printing weekly lows. Lower-than-expected US Consumer Confidence data and the sharp decline in JOLTS Job Openings already pointed to a firm dent in the staggering performance of the US economy since last year. With several data points starting to flash and signal distress, the tipping point could come in sooner than the US Federal Reserve presumes and might need earlier interest-rate cuts than needed in order not to crash the US economy and engineer a soft landing.
The data this Wednesday is confirming the already disappointing initial prints from Tuesday and points to a US economy starting to crumble. Markets are digesting the disappointment of US Gross Domestic Product numbers ahead of the US jobs numbers on Friday. If the US ADP job numbers are any guide, the Nonfarm Payrolls report could turn ugly.
Daily digest: US Dollar at session’s low
- The US economic calendar started off at 11:00 GMT with the Mortgage Bankers Association (MBA) weekly Applications Index. Previous result was a 4.2% decline, and now a 2.3% uptick..
- The monthly ADP employment change was released at 12:15 GMT. Traders will become bearish for the US jobs report on Friday after this number as it missed estimates and dropped from 371K to 177K, where 195K was expected. Past few weeks the ADP number has always been bigger than the official US jobs number on Friday.
- The second estimate of US Gross Domestic Product data came out at 12:30 GMT. The annualized GDP missed estimates and went from 2.4% to 2.1%. The GDP Index went from 2.6% to 2.5%. Wholesale inventories went from -0.7 to -0.1%. The US Dollar was picking up speed in its selloff after this beat on estimate print for GDP on all fronts.
- The US data agenda closed off this Wednesday with Pending Home Sales at 14:00 GMT for both monthly and yearly performances. The monthly reading went from 0.4% to 0.9% and the yearly number went from -15.6% to -14%.
- Asian equity markets closed mildly in the green with no real outliers to mention. US and European equities are advancing mildly in the green and are looking beyond the US GDP disappointment.
- The CME Group’s FedWatch Tool shows that markets are pricing in an 86.5% chance that the Federal Reserve will keep interest rates unchanged at its meeting in September. The 78% probability got quickly reassessed after the downbeat data from the JOLTS report.
- The benchmark 10-year US Treasury bond yield trades at 4.12%, sharply sliding as investors were going long US bonds and US equities.
US Dollar Index technical analysis: DXY snaps winning streak
The US Dollar heads lower after a miss on GDP numbers, together with the beating it took on Tuesday on the back of substantial shrinkage in the JOLTS jobs openings number. Still, the shiny Greenback is starting to fade a little bit and that is being translated with the US Dollar Index (DXY) sliding below 104.00. The overall summer rally for the DXY is still intact, though it is starting to get under pressure.
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 reenter. 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.
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money.
When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions.
The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named 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 during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade 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 principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.