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The US Dollar falls as weak labor market data warns markets

  • US Dollar faces pressure post the release of disappointing Initial Jobless Claims, amplifying fears regarding the US labor market’s health. 
  • Markets look toward ongoing data for clearer direction, the Fed’s hawkish stance could change with continued releases of soft data.
  • All eyes are now on next week’s CPI data.

The US Dollar Index (DXY) is trading at 105.35, slightly down. Despite signals of persistently high inflation acknowledged by Federal Reserve (Fed) Chair Jerome Powell and a recent hawkish stance from the Fed, the Dollar seems to be under mild downward pressure on Thursday due to the report of weak Initial Jobless Claims figures

While the US economy is grappling with sustained inflation and mixed signals from its economic activity, Fed Chair Jerome Powell hinted that cuts might be delayed. As for now, the recent weak Nonfarm Payrolls report did not convince Fed officials, who remain hawkish. The USD dynamics will be set by the incoming data and how the central bank’s members take it.

Daily digest market movers: DXY struggles with Initial Jobless Claims data weighing, Fed officials continue to impact market expectations

  • US Dollar weakened after heavier-than-anticipated Initial Jobless Claims data, marking 231K applications, overshooting 210K forecast and increased jobless claims underscore anxiety over potential labor market weakness in the US.
  • Lack of significant US economic data this week turns investor focus on Fed speakers, which continues attaching to the Fed rhetoric with a slight hawkish twist.
  • Upcoming week’s Producer and Consumer inflation data will be crucial, where higher-than-projected figures could minimize rate cut probabilities this year.
  • While Fed officers maintain caution against rate cuts, the market predicts 10% chance of a June rate cut, 33% in July, 85% in September, and have already priced in November’s cut.

DXY technical analysis: DXY bulls get stuck below the 20-day SMA

The daily Relative Strength Index (RSI) is on a negative slope, although in positive territory. This indicates that the current buying momentum is losing strength, while the Moving Average Convergence Divergence (MACD) printing flat red bars suggests short-term bearish momentum. Since the MACD remains flat, however, this also indicates a lack of strong selling pressure for now.

Regarding its Simple Moving Averages (SMAs), the DXY is below the 20-day SMA, hinting at a short-term bearish bias. However, it maintains a position above the 100 and 200-day SMAs, which typically denote a longer-term bullish trend. This suggests that the bulls retain control over the broader trend, despite recent setbacks.

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.