- The DXY US Dollar Index could snap its winning streak after ADP print.
- Traders are seeing ADP still holding above 100,000 despite undershooting estimates.
- The US Dollar Index retreats from 104 and could be heading sideways into Friday’s US Jobs Report.
The US Dollar (USD) is rolling over and trades in the red after ADP numbers failed to add more US Dollar strength. The underperforming ADP numbers have triggered risk on in equities and see US yields decline further. The mix of all this is base of a bit of Greenback weakness.
On the economic front, traders just had the monthly ADP numbers which, as already mentioned, was a miss on estimates. The 103,000 print was substantially below the expected 130,000 and the previous 113,000. Despite the low number, the Greenback is holding steady in the reaction thereafter, with traders seeing support in the fact that the ADP is holding above 100,000.
Daily digest: ADP triggers risk on
- At 12:00 GMT, the Mortgage Bankers Association released its weekly Mortgage Applications Index. Previous was at 0.3%, and now came in at 2.8%.
- Around 13:15 GMT, the ADP Employment number for November dropped to 103,000, coming from 113,000 previous.
- US Trade Balance data for October got printed after ADP:
- Goods and Services Trade Balance went from $61.5 billion deficit to $64.3 billion deficit.
- The Goods Trade Balance was at a deficit of $89.8 billion in September, and went to a deficit of $89.5 billion.
- Nonfarm Productivity for the third quarter, saw an uptick from 4.7% to 5.2%.
- Unit Labor Costs for the third quarter declined from -0.8% to -1.2%.
- Equities are trying to turn the tide on their negative performance for December. All indices are up across the globe, with Asian equities rallying over 1%.
- The CME Group’s FedWatch Tool shows that markets are pricing in a 99.7% chance that the Federal Reserve will keep interest rates unchanged at its meeting next week.
- The benchmark 10-year US Treasury Note drops to 4.17%. Yields in Europe are falling even quicker.
US Dollar Index technical analysis: Small setback with ADP
The US Dollar trades around 104.00 and looks set to head into a third straight day of gains. Although yields are declining in the US, they are falling even quicker in Europe and other countries, which means that intrinsically the US Dollar is valued higher in terms of return than most of its peers. This rate differential, which persists even in a declining-rate-environment, could see the US Dollar Index (DXY) head back to levels near 105.00-106.00.
The DXY broke the high on Monday and closed off near 103.54 on Tuesday. The DXY could still make it further up, should employment data trigger rising US yields again. A two-tiered pattern of a daily close lower followed by an opening higher would quickly see the DXY back above 104.28, with the 55-day and 100-day Simple Moving Averages (SMA) turned over to support levels.
To the downside, the 200-day SMA shouldact as support and not allow the DXY to drop below 103.57. If it fails, the lows of June make sense to look for some support near 101.92. Should more events take place that initiate further declines in US rates, expect to see a near-full unwind of the 2023 summer rally, heading to 100.82, followed by 100.00 and 99.41.
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.