US Dollar unable to recover gains despite upbeat ISM numbers
- The US Dollar pops up on the back of Fed rate pause.
- Traders see the Greenback fade to flat as dust settles over the Fed meeting.
- The US Dollar Index has 104 in reach if it is able to advance this Thursday.
The US Dollar (USD) is falling back to being nearly flat ahead of the US opening bell, after it initially popped higher on the back of the first rate decision from the US Federal Reserve and commentary from the US Federal Reserve Chairman Jerome Powell. Although Powell pushed back against a March rate cut, that a cut is coming did not get dismissed. In the same push-and-pull pattern markets have seen over the past few weeks, the current US Dollar strength looks to be a mere repricing of the timing of the rate cut, with risk of the US Dollar Index being unable to walk away from that 200-day Simple Moving Average near 103.55.
On the economic front, traders are making their way to the US Jobs Report on Friday, with the weekly Initial Jobless Claims. Although both the continuing and the initial number are still very much in range, the added weight of a doubling in the Challenger Job Cuts number might put traders at unease. Certainly the ones that went long the Greenback on the back of the Fed's rate decision and might see the DXY flip in the red at this pace by the end of the day.
Daily digest market movers: ISM unable to turn the tide
- US approves plans for strikes in Iraq and Syria according to CBS news.
- This Thursday kicked off with the Challenger Job Cuts for January which went to 82,307 against 34,817 previously. That is more than double the amount.
- Jobless Claims are falling in line with the Challenger Job Cuts number and are heading higher as well:
- Initial Claims are seen heading from from 215,000 to 224,000.
- Continuing Claims are heading from 1.828 million to 1.898 million.
- S&P will release its Global Manufacturing Purchase Managers Index (PMI) for January around 14:45. Previous was at 50.3.
- At 15:00 the Institute of Supply Management (ISM) has released its January ISMManufacturing PMI numbers:
- Manufacturing PMI seen heading from 47.4 to 49.1.
- ISM Manufacturing Prices Paid went from 45.2 to 52.9.
- ISM Manufacturing New Orders Index was previously at 47 and went to 52.5..
- The Employment Index was at 48.1 and got revised to 47.5, heading to 47.1 in January.
- Around 16:30 the US Treasury Department will allocate a 4-week bill.
- Equity markets remain mixed and clueless for direction in the aftermath of the Fed and Bank of England rate decision. US equities are mildly in the green.
- The CME Group’s FedWatch Tool is now looking at the March 20th meeting. Expectations for a pause are 64.5%, while 35.5% calls for a rate cut.
- The benchmark 10-year US Treasury Note trades substantially lower to 3.88%, the lowest level for this week and sinking quickly.
US Dollar Index Technical Analysis: Back to square one ahead of US NFP
The US Dollar Index (DXY) has jumped higher in the aftermath of the Fed’s rate decision and Fed Chair Jerome Powell’s speech. Though, some parental advisory needs to come with this move as clearly a rally is not set to play out here. The Fed has done a good job on Wednesday to steer markets away from a rate cut in March and avoid a massacre, while rate cuts in May or June are becoming more plausible and logical, and do not require a hefty repricing of the US Dollar for that matter.
Should the US Dollar Index be able to finally break away from the 200-day Simple Moving Average (SMA) at 103.55, traders should look to the 100-day SMA near 104.30 as the next level. Should the US Jobs Report on Friday see its components all fall in favor of more US Dollar strength, expect to see another jump higher to 105.12. That would mean a fresh three-month-high for the DXY.
In the same push-and-pull scenario that the DXY has been performing for nearly half of January, it would be plausible that the US Dollar loses traction against most of its peers and the US Dollar Index retracts again. Expect to see first support from the 200-day SMA near 103.55 before heading to the 55-day SMA at 103. Should that last level snap, a nosedive move to 102.00 could very well be in the cards here.
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.
