- The US Dollar is back flirting with a break lower.
- Traders are going into risk-on mode with German and EU PMI numbers improving.
- The US Dollar Index faces pressure on the 103-handle again.
The US Dollar (USD) sinks lower with traders selling the Greenback in the assumption US Purchase Managers Index (PMI) numbers later this Wednesday will retreat further, while European ones a starting to turn. The initial moves came with German and European Purchasing Manager Indexes (PMIs), which in nearly all sectors showed improvement (though remaining in contraction territory). A further contraction in US PMI numbers later this afternoon could mean a meltdown for the Greenback.
On the economic front, as already mentioned in the above paragraph, US PMI numbers are set to be released this afternoon. The Manufacturing number will be especially significant (it is expected to remain unchanged at 47.9). Seeing the current market move already, a further sell-off of the Greenback could be at hand and see the DXY slide lower.
Daily digest market movers: Traders bet on PMI contraction with hopes for Fed cuts
- German Purchase Manager Index numbers pumped up the Euro against the US Dollar. German Manufacturing went to 45.4, coming from 43.3.
- French Manufacturing PMI was an upbeat surprise as well, heading form 44.4 to 46.6.
- The US Mortgate Applicatoins from the Mortgage Bankers Association has already been released and came in at 3.7%, from 10.4% last week.
- Near 14:45 GMT S&P Global is due to release the Purchase Manager Index for major sectors in the US:
- Manufacturing for January is expected to remain unchanged at 47.9.
- Services are expected to head to 51.0 from 51.4.
- Composite number was at 50.9 with no expectation pencilled in.
- The US Treasury will place a 5-year Note in the market near 18:00.
- Equity markets are in the green after the positive evolution in the German and EU PMI numbers. All European indices are up over 1%. In the US Netflix released better-than-expected subscription numbers, which sent the Nasdaq soaring ahead of the US opening bell.
- The CME Group’s FedWatch Tool shows that markets are pricing in a 97.4% possibility for an unchanged rate decision on January 31, with a slim 2.6% chance of a cut.
- The benchmark 10-year US Treasury Note sinks lower and flirts with a break below 4% as risk on is back in the markets .
US Dollar Index Technical Analysis: PMI to deliver a blow to the US Dollar revival in 2024
The US Dollar Index (DXY) is down after Europe reported two upbeat numbers in the Manufacturing PMI print. Though the two European numbers are still in contraction, this does not mean the EU is out of the woods yet, or is outperforming the US. This afternoon’s US PMI numbers could either eke out more losses for the Greenback if the numbers disappoint, or send the Greenback back to its earlier level in Asian trading if they surprise to the upside.
There are some economic data points that could still build a case for the DXY to get through those two moving averages again and run away. Look for 104.44 as the first resistance level on the upside, in the form of the 100-day SMA. If that gets scattered as well, nothing will hold the DXY from heading to either 105.88 or 107.20 – the high of September.
A bull trap looks to be underway, where US Dollar bulls were caught buying into the Greenback when it broke above both the 55-day and the 200-day SMA in last week’s trading. Price action could decline substantially and force US Dollar bulls to sell their positions at a loss. This would see the DXY first drop to 102.60, at the ascending trend line from September. Once below it, the downturn is open towards 102.00.
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.