US Dollar two-faced trading day ends with Greenback cracking under pressure
- The US Dollar gives up all its earlier gains and erases Thursday gains as PCE data came out in line with expectations.
- Markets are perceiving it as weak and are reversing their earlier steps.
- The US Dollar Index dips toward the lower part near 103.00
The US Dollar (USD) is on the chopping block and is being thrown out the window at the US trading session is picking up speed with US Dollar bulls running into a numerous number of headwinds. The Personal Consumption Expenditures numbers all came out in line of expectations. Markets continued their unwinding of long US Dollar positions in several currencies intraday as just minutes before the numbers came out, the Chinese People's Bank of China (PBoC) issued warnings that it wants a stable Yuan and it will use internventions if needed to support the Chinese currency. This triggered already a substantial sell off in US Dollar that was retreating from several session's high positions.
There aren’t any Federal Reserve (Fed) speaking on Friday, so traders can mainly go into data-trading. At 12:30 GMT, the Personal Consumption Expenditures (PCE) Price Index numbers will came out and pointed to further easing of inflation, making the markets believe that a one-and-done hike is the only game in town as of now. The Chicago Purchase Managers Index undershoots expectations while at 14:00 GMT the final reading of the University of Michigan Consumer Sentiment Index for June will be released. Depending on their outcome, these two data points could support some more follow-through on the current trend in the US Dollar or trigger a turnaround.
Daily digest: US Dollar gives it all back
- The PBoC comes out in a statement that it wants to keep the Yuan stable, and that current demand is still insufficient for growth. It will ste up its macroeconomic policy adjustments to support the economy.
- The US State department approved a possible military sale to Taiwan, adding tension against China after the earlier AI chip export curbs out of the US toward China. The sale would still need to pass several security checks and approvals before actually taking place.
- The Japanese Yen weakened to $145 for the first time since November and is at risk of a market intervention by the Japanese finance ministry.
- China’s PBoC fixed the USD/CNY at 7.2258, quite far below the expected 7.2485 from market consensus. Markets ignored the fixing and even sent USD/CNY completely the other way to peak at $7.27.
- The most expected market moving event for Friday at 12:30 GMT proved to be an game changer for the US Dollar as the Personal Consumption Expenditures Price Index data for May held no surprises. The PCE Index on a monthly basis came in at 0.4%, stable from 0.4% in April. On a yearly basis, PCE inflation decelerated to 3.8%, coming from 4.4%. Both the monthly and yearly Core PCE are seen stable at 0.3% and 4.4%, just each time 0.1% lower from previous month. Personal Income steady and unchanged at 0.4%, while the Personal Spending decelerated significantly, from 0.8% to only 0.1%.
- Chicago Purchasing Managers Index for June disappoints at 41.5, while 43.8 was expected. This results in the US Dollar another few pips against several major currencies.
- At 14:00 GMT, the Michigan Consumer Sentiment Index for June will come out, which is expected to remain unchanged at 63.9. Participants for the survey had the opportunity as well to pencil in inflation expectations over the next year and for the next 5-to-10 years. Currently, the one-year inflation forecast is at 3.3%. An uptick or lower number could move the US Dollar in either direction.
- As the US session is set to open, European equities are getting some tailwinds as investors and traders are trying to eke out gains this Friday. The DAX jumps over 1% higher and the US equity futures are all in the green with the Nasdaq leading the charge.
- The CME Group FedWatch Tool shows that markets are pricing in a 86.8% chance of a 25 basis points (bps) interest-rate hike on July 26. The Fed hike is very much locked in as US GDP numbers showed that the US economy can whistand and endure some more rate hikes. Still, markets are reluctant to price in a second rate hike in the last meetings for 2023.
- The benchmark 10-year US Treasury bond yield trades at 3.87%. The proof of the US economy being in good health made investors reduce their safe haven positions and pushed US yields higher.
US Dollar Index technical analysis: USD bulls to the slaughter house
The US Dollar sees its early gains completely erased as several pairs against the US Dollar flip in the red and are seeing the Greenback taking a firm step back. Aspecially the double whammy of first the PBoC threatening language in terms of interventions followed by a very in-line PCE report made the Greenback erase a lot of gains and makes the US Dollar Index a touch weaker. With 103 broken to the downside it is a question on where the decline will come to a hold, as the move does not seem to be stopping anytime soon.
On the upside, look for 103.50 as the next key resistance level in order to lock in some solid support and a safe region where the Dollar index can take a breather before heading higher. The 200-day Simple Moving Average (SMA) at 104.98 is still quite far away. So the intermediary level to look for is the psychological level at 104.00 and May 31 peak at 104.70.
On the downside, the 55-day SMA near 102.67 is up for proving its reliability as a support after being chopped up that much in the last two weeks. A touch lower, 102.50 will be vital to hold from a psychological point of view. In case the DXY slips below 102.50, more weakness is expected with a full slide to 102.00 and a retest of June’s low at 101.92.
Fed FAQs
What does the Federal Reserve do, how does it impact the US Dollar?
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.
How often does the Fed hold monetary policy meetings?
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.
What is Quantitative Easing (QE) and how does it impact USD?
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.
What is Quantitative Tightening (QT) and how does it impact 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.
Author
Filip Lagaart
FXStreet
Filip Lagaart is a former sales/trader with over 15 years of financial markets expertise under its belt.
