US Dollar extends uptrend to start all-important Fed week
- US Dollar stays strong against its major rivals to start the week.
- US Dollar Index clings to modest daily gains above 101.00.
- US data showed that private sector's economic activity continued to expand in July.
The US Dollar started the new week on a bullish note after having outperformed its major rivals in the previous week. The US Dollar Index, which tracks the USD's valuation against a basket of six major currencies, touched its highest level since July 12 near 101.50 in the early European session.
The USD captured capital outflows out of the Euro and Pound Sterling after the Services and Manufacturing PMI data from Germany, the EU and the UK came in weaker than expected for early July.
US S&P Global Manufacturing PMI improved to 49 in July's flash estimate from 46.3 in June. Services PMI edged lower to 52.4 from 54.4 in the same period. Finally, Composite PMI declined to 52 from 53.2, pointing to an ongoing expansion in the private sector's business activity, albeit at a softening pace.
The US Federal Reserve's two-day policy meeting will start on Tuesday and the interest rate decision will be announced on Wednesday.
Daily digest market movers: US Dollar gathers strength on Monday
- Commenting on PMI surveys' findings, "July is seeing an unwelcome combination of slower economic growth, weaker job creation, gloomier business confidence and sticky inflation," said Chris Williamson, Chief Business Economist at S&P Global Market Intelligence. "The overall rate of output growth, measured across manufacturing and services, is consistent with GDP expanding at an annualized quarterly rate of approximately 1.5% at the start of the third quarter," he added.
- 10-year US Treasury bond yield staged a rebound in the second half of last week and closed above 3.8% after having declined toward 3.7% earlier in the week. Following the PMI data, 10-year yield holds steady at around 3.8%.
- According to the CME Group FedWatch Tool, a 25-basis-point Fed rate hike on Wednesday is fully priced in. The probability of the Fed hiking the policy rate one more time before the end of the year stands at 23%.
- Assessing the USD's short-term outlook, "positioning data suggests investors are running reasonably large short Dollar positions into this week's Fed, ECB and BoJ policy meetings," noted economists at ING. "We do like a weaker USD later this year, but the Dollar's recent corrective rally might endure this week if the Fed hangs onto its tightening bias."
- Wall Street's main indexes opened mixed on Monday. After the opening bell, the Dow Jones Industrial Average was up 0.4% and the Nasdaq Composite was down 0.2%.
- German HOCB Composite PMI fell to 48.3 in Early July from 50.6 in June. Commenting on the data, “There is an increased probability that the economy will be in recession in the second half of the year," said Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank (HCOB).
- HCOB Composite PMI for the Eurozone worsened to 48.9 from 49.9 in the same period, while the UK S&P Global/CIPS Composite PMI fell to 50.7 from 52.8.
Technical analysis: US Dollar Index keeps the bullish bias
The US Dollar Index (DXY) started to edge higher after having tested 101.00 (static level) earlier in the day, confirming that level as important near-term support. Meanwhile, the Relative Strength Index (RSI) indicator on the daily chart extended its recovery toward 50, reflecting the lack of seller interest.
On the upside, the 20-day Simple Moving Average (SMA) aligns as dynamic resistance at 101.70 ahead of 102.00 (static level, former support). A daily close above the latter could bring in additional buyers and open the door for an extended uptrend toward 102.50/60 (50-day SMA, 100-day SMA).
In case the DXY returns below 101.00, 100.50 (static level) could be seen as the next support before 100.00 (psychological level, static level).
US Dollar FAQs
What is the US Dollar?
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.
How do the decisions of the Federal Reserve impact the US Dollar?
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.
What is Quantitative Easing and how does it influence the US Dollar?
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.
What is Quantitative Tightening and how does it influence the 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.
Author
Eren Sengezer
FXStreet
As an economist at heart, Eren Sengezer specializes in the assessment of the short-term and long-term impacts of macroeconomic data, central bank policies and political developments on financial assets.
