- Strong Initial Jobless Claims data triggers the USD, yet aggressive easing might limit the upside.
- Investors await further clues on the US economy.
- Markets continue to underestimate the Fed and are confident that it will rush to cut.
The US Dollar (USD), measured by the US Dollar Index (DXY), held steady at around 103.00 on Thursday after a two-day rebound. Strong Initial Jobless Claims data for the week ending August 3 is helping the USD to gain traction as the market awaits deeper insights into the US economy.
Taking into account all data, the overall US economic outlook remains positive, with growth still tracking above trend. This suggests that the market may be overvaluing aggressive easing once again, as it did at the start of the week.
Daily digest market movers: USD gains from strong Initial Jobless Claims surrounding wait-and-see sentiment
- On the data front, US citizens applying for unemployment insurance benefits rose by 233K, below the initial consensus of 240K and lower than the previous week’s gains of 250K (revised from 249K).
- Market sentiment dipped after the weak 10-year US Treasury auction on Thursday morning, affecting global equity markets today. Despite a moderately dovish BOJ summary, markets are still cautious.
- Volatility across all markets is expected to remain high into next week when top-tier US data should provide a clearer picture of the US economy.
- The market is still pricing in 100 bps of easing by year-end, with a 40% chance that an additional 25 bps will be added. The first cut in September is expected to be around 50 bps.
DXY technical outlook: Indicators improve but remain in red, maintaining a bearish bias
Despite the technical outlook showing improvements, the indicators remain in the red. The Relative Strength Index (RSI) is still below 50, and the Moving Average Convergence Divergence (MACD) is hitting lower red bars.
As the week unfolds, supports stand at 103.00, 102.50 and 102.20 with resistances at 103.50 and 104.00. A break above this last resistance will improve the outlook, and buyers will have gained the 20-day Simple Moving Average (SMA).
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.
