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US Dollar flat after ISM and S&P Global final readings erase recession fears for now

  • The US Dollar trades lower with ADP coming in softer. 
  • Services PMI’s from S&P Global and ISM came in touch stronger. 
  • The US Dollar Index picks up and moves away from 100.00 level. 

The US Dollar (USD) trades softer on Thursday, with a lot of data points set to be released in a condensed time span. The Greenback already eased on the back of the JOLTS Job Openings report on Wednesday, when the previous number was revised and the recent print for July came in below the estimation. It was enough for markets to price in more rate cuts by the Federal Reserve (Fed) and devalue the US Dollar on the back of narrowing the interest rate gap between the US and other countries. 

On the economic data front, it will be up to experienced traders to navigate the set of data that will be released on Thursday to markets. The monthly ADP Employment Change for the private payrolls release already came in softer than expected, while the previous number got revised down as well. The Purchase Managers Index final readings for August from S&P Global and the Institute for Supply Managment (ISM) came in supportive for the Greenback and halted the intraday decline. 

Daily digest market movers: Final Services readings help out

  • At 11:30 GMT, the Challenger Job Cuts for August jumped up 193% from 25,885 to 75,891.
  • At 12:15 GMT, the ADP Employment Change for August contracted from 122,000 to only 99,000. That is below the estimated elevated number at 145,000. To make matters even worse, the July number got revised lower from 122,000 to 111,000.
  • At 12:30 GMT, the weekly Jobless Claims data came in:
    • Initial Claims came in at 227,000, coming from 232,000 previously. 
    • Continuing Claims falls from 1.860 million to 1.838 million for this week. 
    • In the slipstream of the weekly Jobless Claims, the monthly Nonfarm Productivity and Unit Labor Costs for the second quarter were released. For the Nonfarm Productivity, a small uptick from 2.3% to 2.5%. The Labor Cost fell from 0.9% to 0.4%.
  • At 13:45 GMT, S&P Global has delivered its final reading for the Services and Composite PMI numbers for August. Services came in a touch stronger, from 55.2 to 55.7. The Composite went from 54.1 to 54.6. 
  • The Institute for Supply Management (ISM) released its August reading for the Services sector:
    • The PMI headline number went from 51.4 to 51.5.
    • The Employment Index was at 51.1 the previous month, and came in at 50.2.
    • The New Orders Index was at 52.4 in July, and came in stronger at 53.
    • The Prices Paid Index was at 57, and saw a small uptick to 57.3.
  • Equities jumped higher in the US after that ISM release, taking away some concerns on a possible recession in the US should those data points deteriorate as well. 
  • The CME Fedwatch Tool shows a 55.0% chance of a 25 basis points (bps) interest rate cut by the Fed in September against a 45.0% chance for a 50 bps cut.  Another 25 bps cut (if September is a 25 bps cut) is expected in November by 30.2%, while there is a 49.5% chance that rates will be 75 bps (25 bps + 50 bps) below the current levels and a 20.3% probability of rates being 100 (25 bps + 75 bps) basis points lower. 
  • The US 10-year benchmark rate trades at 3.75%, just above the lowest level for this Thursday

US Dollar Index Technical Analysis: Small sigh of relief

The US Dollar Index (DXY) looks to be stuck in a tight range, remaining there for now after Tuesday’s data was unable to move the needle. With the JOLTS Job Openings report on Wednesday, the assumption is the same: any number that comes in substantially above or below consensus will move the DXY in either direction. Meanwhile, markets are giving a bigger chance to a 50 basis point rate cut by the Fed this month. 

The first resistance at 101.90 is starting to look very difficult to break through after it already triggered a rejection earlier this week. Further up, a steep 2% uprising would be needed to get the index to 103.18.  Finally, a heavy resistance level near 104.00 not only holds a pivotal technical value, but it also bears the 200-day Simple Moving Average (SMA) as the second heavyweight to cap price action.

On the downside, 100.62 (the low from December 28) could soon see a test in case data supports more rate cuts from the US Federal Reserve (Fed).  Should it break, the low from July 14, 2023, at 99.58, will be the ultimate level to look out for. Once that level gives way, early levels from 2023 are coming in near 97.73.

US Dollar Index: Daily Chart

Banking crisis FAQs

The Banking Crisis of March 2023 occurred when three US-based banks with heavy exposure to the tech-sector and crypto suffered a spike in withdrawals that revealed severe weaknesses in their balance sheets, resulting in their insolvency. The most high profile of the banks was California-based Silicon Valley Bank (SVB) which experienced a surge in withdrawal requests due to a combination of customers fearing fallout from the FTX debacle, and substantially higher returns being offered elsewhere.

In order to fulfill the redemptions, Silicon Valley Bank had to sell its holdings of predominantly US Treasury bonds. Due to the rise in interest rates caused by the Federal Reserve’s rapid tightening measures, however, Treasury bonds had substantially fallen in value. The news that SVB had taken a $1.8B loss from the sale of its bonds triggered a panic and precipitated a full scale run on the bank that ended with the Federal Deposit Insurance Corporation (FDIC) having to take it over.The crisis spread to San-Francisco-based First Republic which ended up being rescued by a coordinated effort from a group of large US banks. On March 19, Credit Suisse in Switzerland fell foul after several years of poor performance and had to be taken over by UBS.

The Banking Crisis was negative for the US Dollar (USD) because it changed expectations about the future course of interest rates. Prior to the crisis investors had expected the Federal Reserve (Fed) to continue raising interest rates to combat persistently high inflation, however, once it became clear how much stress this was placing on the banking sector by devaluing bank holdings of US Treasury bonds, the expectation was the Fed would pause or even reverse its policy trajectory. Since higher interest rates are positive for the US Dollar, it fell as it discounted the possibility of a policy pivot.

The Banking Crisis was a bullish event for Gold. Firstly it benefited from demand due to its status as a safe-haven asset. Secondly, it led to investors expecting the Federal Reserve (Fed) to pause its aggressive rate-hiking policy, out of fear of the impact on the financial stability of the banking system – lower interest rate expectations reduced the opportunity cost of holding Gold. Thirdly, Gold, which is priced in US Dollars (XAU/USD), rose in value because the US Dollar weakened.