US Dollar slightly weaker to start the week, markets eye US GDP data
- US Dollar struggles to gather strength but losses remain limited for now.
- Key macroeconomic data releases from the United States this week could drive USD valuation.
- US Dollar Index remains technically bearish in the near term.
The US Dollar (USD) failed to benefit from the stronger-than-expected S&P Global PMI surveys on Friday and the US Dollar Index closed the previous week virtually unchanged. At the beginning of the new week, the USD stays under modest selling pressure against its rivals. Ahead of the key macroeconomic data releases later in the week, including the first quarter Gross Domestic Product (GDP) and April Personal Consumption Expenditures (PCE) Price Index, investors could refrain from betting on further USD weakness.
The US Dollar Index, which tracks the USD performance against a basket of six major currencies, trades modestly lower on the day, slightly above 101.50.
Daily digest market movers: US Dollar remains directionless for now
- The data from the US revealed on Friday that the economic activity in the private sector expanded at a strengthening pace in April with S&P Global Composite PMI rising to 53.5 (flash) from 52.3 in March.
- S&P Global Manufacturing PMI improved to 50.4 in the same period from 49.2 and Services PMI rose to 53.7, surpassing analysts’ forecast of 51.5.
- Commenting on the data, “the latest survey adds to signs that business activity has regained growth momentum after contracting over the seven months to January,” noted Chris Williamson, Chief Business Economist at S&P Global Market Intelligence.
- Wall Street’s main indexes opened mixed on Monday. At the time of press, the Dow Jones Industrial Average was up 0.1% while the S&P 500 was down 0.15%.
- 10-year US Treasury bond yield stays in negative territory but manages to hold above 3.5%.
- The Federal Reserve Bank of Chicago announced that the National Activity Index remained unchanged at -0.19 in March. This reading came in weaker than the market expectation of -0.02 but failed to trigger a noticeable market reaction.
- The Federal Reserve Bank of Dallas will publish the Texas Manufacturing Survey for April later in the session.
- The CME Group FedWatch Tool shows that markets are currently pricing a nearly 90% probability of one more 25 basis points Federal Reserve (Fed) rate hike at the upcoming meeting.
- The Fed will be in the blackout period until the policy decisions are announced next week, May 3.
- The US Bureau of Economic Analysis will unveil the first estimate of first-quarter GDP growth on Thursday. The US economy is forecast to expand at an annualized rate of 2% in Q1, down from the 2.6% recorded in the last quarter of 2022.
Technical analysis: US Dollar Index struggles to gain traction
The US Dollar Index trades slightly below the 20-day Simple Moving Average (SMA), currently located at 102.00. In case the DXY closes the day above that level, it could target 103.00 (static level, psychological level) and 103.40 (50-day SMA, 100-day SMA).
Meanwhile, the Relative Strength Index (RSI) indicator on the daily chart moves sideways slightly below 50, suggesting that buyers remain reluctant to bet on a steady recovery in the DXY.
On the downside, 101.50 (static level) align as interim support ahead of 101.00/100.80 (psychological level, static level, multi-month low set on April 14). A daily close below that support area could open the door for an extended slide toward 100.00 (psychological 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.