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US Dollar sinks after US PMI's reveals US outperformance stalls

  • The US Dollar fals back to session's low and is set for a more than 2% loss this week in Dollar Index. 
  • US President Trump delivered softer comments that tariffs on China might not finally be imposed. 
  • The US Dollar Index (DXY) falls below 107.50 and is testing more downside. 

The US Dollar Index (DXY), which tracks the performance of the US Dollar against six different major currencies, is sinking back below 107.50 in an eventful Friday, facing an intraday loss on Friday after US President Donald Trump left surprised with comments the previous day casting doubts on the application of tariffs on China. The comments came after Trump had a phone call with China’s President Xi Jinping. Meanwhile, the Bank of Japan (BoJ) hiked interest rates by 25 basis points, which triggered substantial losses for the US Dollar (USD) against the Japanese Yen (JPY). 

In the economic data front, Markit has already released Germany’s Purchasing Managers Index (PMI) preliminary readings for January, with some strong upbeat numbers, fueling more Euro (EUR) strength against the US Dollar (USD). Later this Friday, the US has received its S&P Global PMI preliminary readings for the same month. The Services component, which is the most important one, missed its estimate and came in softer than the month before. 

Daily digest market movers: US economy is starting to turn

  • US President Donald Trump released comments about his phone call with Chinese President Xi Jinping. He surprised markets by saying he does not want to impose tariffs on China, Bloomberg reported. 
  • US President Trump commented on the Federal Reserve and US rates, affirming that he would demand an immediate cut in US interest rates, Bloomberg reports. 
  • Germany saw its preliminary Services PMI jump to 52.5 in January, beating the 51.0 estimate and above the previous 51.2. The Composite PMI was able to head out of contraction, reaching 50.1 and beating the expected 48.2 and the previous 48.0.
  • At 14:45 GMT, the US has received its PMI preliminary reading for January from S&P Global:
    • Servicesfell to 52.8, missing the 56.5 estimate, slowing down from 56.8 in December’s final reading. 
    • Manufacturing was a surprise and came in at 50.1, above the 49.6 estimate and coming from 49.4.
  • The University of Michigan’s final reading for its Consumer Sentiment Index for January came in softer at 71.1, below the previous 73.2. The 5-year inflation expectation component is also remained unchanged at 3.3%.
  • Equities are mixed, with China and Europe in positive territory as markets tune down Trump’s tariffs risk. However, US equities look sluggish and trade flat.  
  • The CME FedWatch tool projects a 52.2% chance that interest rates will remain unchanged at current levels in the May meeting, suggesting a rate cut in June. Expectations are that the Federal Reserve (Fed) will remain data-dependent with uncertainties that could influence inflation during US President Donald Trump’s term. 
  • The US 10-year yield is trading around 4.625%, off its poor performance seen earlier this week at 4.528% and still has a long way to go back to the more-than-one-year high from last week at 4.807%.

US Dollar Index Technical Analysis: A weaker dollar, really?

The US Dollar Index (DXY) is taking some punches and heading lower, hand in hand with US yields. Although US President Trump might suddenly soften his stance on tariffs, it is still early in his term to rule out any tariff implementation on China and other countries. Tail risks are forming, with markets starting to downplay the actual stance, which might still see the US Dollar rally if Trump slaps tariffs on China. 

The DXY has its work cut out to recover to levels seen at the start of this week. First, the big psychological level at 108.00 needs to be recovered. From there, 109.29 (July 14, 2022, high and rising trendline) is next to pare back incurred losses from this week. Further up, the next upside level to hit before advancing further remains at 110.79 (September 7, 2022, high). 

On the downside, the convergence of the high of October 3, 2023 and the 55-day Simple Moving Average (SMA) around 107.50 should act as a double safety feature to support the DXY price. For now, that looks to be holding, though the Relative Strength Index (RSI) still has some room left to the downside. Hence, rather look for 106.52 or even 105.89 as better levels for US Dollar bulls to engage and trigger a reversal. 

US Dollar Index: Daily Chart

US Dollar Index: Daily Chart

Fed FAQs

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.

Author

Filip Lagaart

Filip Lagaart is a former sales/trader with over 15 years of financial markets expertise under its belt.

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