US Dollar weakens as markets assess Fed decision, Chairman Powell’s comments
- US Dollar came under renewed selling pressure on Wednesday.
- Dovish Fed tone weighs on US Treasury bond yields and force US Dollar lndex to push lower.
- FOMC Chairman Powell refrained from committing to a pause in the tightening cycle.
The US Dollar (USD) struggled to find demand during the American trading hours on Tuesday and the US Dollar Index (DXY) snapped a three-day winning streak. The USD stays under heavy selling pressure mid-week and the DXY trades deep in negative territory as investors lean toward a dovish tilt in the Federal Reserve’s (Fed) policy outlook.
Although the Fed raised its policy rate by 25 basis points (bps) to the range of 5-5.25% in May as expected, it dropped language saying that it “anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time.” With the immediate reaction to this dovish tone, the USD selloff picked up steam in the late American session.
In the post-meeting press conference, FOMC Chairman Jerome Powell refrained from confirming a pause in rate hikes in June when asked about it. Moreover, Powell noted that it would not be appropriate to cut rates this year given their view that it will take some time for inflation to come down. These comments helped the US Dollar erase some of its initial losses but the DXY remains on track to post losses for the second straight day.
According to the CME Group FedWatch Tool, the probability of the US central bank raising its policy rate one more time in June is less than 10%, compared to nearly 40% just a week ago.
Daily digest market movers: US Dollar struggles to stay resilient against its rivals
- The data published by Automatic Data Processing (ADP) showed on Wednesday that private sector employment in the US rose by 296,000 in April, surpassing the market expectation for an increase of 148,000 by a wide margin.
- Commenting on the survey’s findings, “employers are hiring aggressively while holding pay gains in check as workers come off the sidelines. Our data also shows fewer people are switching jobs,” said Nela Richardson, chief economist, ADP.
- The ISM Services PMI improved modestly to 51.9 in April from 51.2 in March. This reading revealed that the business activity in the service sector continued to expand at a soft pace. The Prices Paid Index, the input inflation component, ticked up to 59.6 from 59.5 and the Employment Index declined to 50.8 from 51.3.
- The data published by the US Census Bureau revealed on Tuesday that new orders for manufactured goods, Factory Orders, increased $4.9 billion, or by 0.9%, to $539 billion in March.”
- The US Bureau of Labor Statistics (BLS) announced that the number of job openings on the last business day of March stood at 9.59 million, compared to 9.97 million in February. This reading came in below the market expectation of 9.77 million.
- The ISM Manufacturing PMI improved slightly to 47.1 in April from 46.3 in March. This reading showed that the contraction in the manufacturing sector’s activity continued, albeit at a softer pace.
- The ISM’s survey further revealed that the Price Paid sub-index, the input inflation component, climbed to 53.2 from 49.2, playing into the hawkish Fed narrative.
- US regulators seized First Republic Bank and agreed to sell a majority of its assets to JPMorgan Chase & Co. Last week, the bank reported that there were more than $100 billion of deposit outflows in the first quarter.
- In the first half of the trading session on Tuesday, PacWest Bancorp shares were down more than 30%, while Western Alliance Bancorporation stocks were losing over 20%. The financial-heavy Dow Jones Industrial Average lost more than 1% on the day.
- The European Central Bank (ECB) noted in its Bank Lending Survey that a net 38% of Eurozone banks reported a fall in demand for credit from companies in the first quarter of the year. The ECB will announce its monetary policy decisions on Thursday.
Technical analysis: US Dollar Index remains technically bearish
The Relative Strength Index (RSI) indicator on the daily chart for the US Dollar Index (DXY) retreated below 50 on Wednesday. Additionally, the DXY now stays below the 20-day Simple Moving Average (SMA), which is currently located at 101.80, reflecting the bearish shift in the short-term technical outlook.
On the downside, the DXY could face first support at 101.00 (static level, psychological level) before bears could aim for the key 100.00 psychological level.
101.80 (20-day SMA) aligns as interim resistance. With a daily close above that level, the DXY could extend its rebound toward 102.50 (static level) and 103.00 (50-day SMA, 100-day SMA).
How does Fed’s policy impact US Dollar?
The US Federal Reserve (Fed) has two mandates: maximum employment and price stability. The Fed uses interest rates as the primary tool to reach its goals but has to find the right balance. If the Fed is concerned about inflation, it tightens its policy by raising the interest rate to increase the cost of borrowing and encourage saving. In that scenario, the US Dollar (USD) is likely to gain value due to decreasing money supply. On the other hand, the Fed could decide to loosen its policy via rate cuts if it’s concerned about a rising unemployment rate due to a slowdown in economic activity. Lower interest rates are likely to lead to a growth in investment and allow companies to hire more people. In that case, the USD is expected to lose value.
The Fed also uses quantitative tightening (QT) or quantitative easing (QE) to adjust the size of its balance sheet and steer the economy in the desired direction. QE refers to the Fed buying assets, such as government bonds, in the open market to spur growth and QT is exactly the opposite. QE is widely seen as a USD-negative central bank policy action and vice versa.