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US Dollar gains finds traction despite soft weekly Jobless Claims data

  • DXY Index trading exhibits modest gains, rising to 104.45.
  • Markets hope Fed announces early rate cut due to lower-than-expected CPI data.
  • Weak Initial Job Claims, declining Philadelphia Fed Manufacturing support dovish rhetoric.

The US Dollar Index (DXY) is mildly trading up at 104.45 on Thursday as sellers seem to be consolidating the sharp downward movement from Wednesday’s session.

The US economy is hinting toward a slowdown, evidenced by the unexpected Initial Jobless Claims rise and a Philadelphia Fed Manufacturing Survey contraction. Softer-than-expected inflation data reported on Wednesday supports this idea, which makes markets hope that the Federal Reserve (Fed) might consider rate cuts sooner rather than later, a thesis that weakens the USD.

Daily digest market movers: DXY under selling pressure as soft data warns markets

  • Wednesday’s softer Consumer Price Index (CPI) indicates potential disinflation, which might speed up Fed’s possible interest rate cuts.
  • Initial Jobless Claims for the week ending May 3 rose to 222K, surpassing estimates. The figure for the previous week was also revised to a higher 232K.
  • Philadelphia Fed Manufacturing Survey (an index assessing the state of manufacturing in Philadelphia) for May depicted a contraction to 4.5, underperforming market predictions.
  • CME FedWatch Tool predicts about a 75% chance of reduced fed funds rate post-September meeting, up from pre-CPI expectations of 65%.

DXY technical analysis: DXY finds some light, outlook remains bearish

The Relative Strength Index (RSI) is sitting flat in negative territory on Thursday, indicating the weakening of the buying momentum. This means that, although demand is declining, the selling momentum isn’t getting any stronger. The Moving Average Convergence Divergence (MACD) is exhibiting flat red bars, which suggest a similar situation – neither the bulls nor the bears seem to have a strong grip over the price momentum presently.

Looking at the Simple Moving Averages (SMAs), the DXY is below the 20-day SMA, which spelled a short-term bearish tone. However, the fact that the index remains above the 100-day and 200-day SMAs might be signaling a protective floor ensured by the bulls.

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.