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US Dollar stabilizes post ISM PMIs data

  • US Dollar recovers after slight losses following ISM PMIs data.
  • Dollar finds cushion on high US Treasury yields.
  • Signs of disinflation have begun to surface in the US economic landscape, which might justify bringing cuts forward.

As the week begins, the US Dollar based on the DXY Index has cleared daily losses and currently sits near 105.90, following the recent ISM Manufacturing PMI figures. The sustained levels of high US Treasury yields continue to lend strength to the DXY.

Distinct signs of disinflation are beginning to emerge within the US economic climate, bolstering confidence among market players for a rate cut in September. Federal Reserve (Fed) officials, however, are treading carefully and continue to abide by their data-dependent stance.

Daily digest market movers: US Dollar recovers despite weak ISM PMIs, eyes on labor market data

  • ISM Manufacturing PMI recorded a drop, shifting to 48.5 in June from 48.7 in April. This fell below the projected market expectation of 49.1.
  • The Employment Index, part of the PMI survey, also marked a dip from 51.1 in May to 49.3.
  • New Orders Index, on the other hand, witnessed an improvement from 45.4 to 49.3.
  • High anticipation for the week comes for June’s Nonfarm Payrolls to be released this Friday. According to Bloomberg’s consensus, it is expected to be 190K versus 272K in May.
  • Equally important will be Wednesday’s report on ADP private sector jobs expected at 158K versus 152K in May.
  • The release of May’s FOMC minutes will provide deeper insights into the Fed’s cautious stance.

DXY technical outlook: Persistent positive momentum, index eyes higher levels

Maintaining a positive outlook, despite minor fluctuations, both the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) depict a stable terrain. The RSI continues to hold above 50 with a marginal flattening, while MACD sustains its green bar projections, indicating minor traction in the bullish momentum.

Resolutely above its 20, 100 and 200-day Simple Moving Averages (SMAs), the DXY continues trading in high levels observed since May, with the 106.50 and 106.00 zones in its sightline. However, observers should also keep an eye on the 105.50 and 105.00 zones in case of potential drawdowns.

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.