US Dollar rising despite softer PMI data

• US Dollar holds its ground on Monday, rising despite softer PMI data.
• Market prices in 75 bps of Fed easing by year-end.
• Fed's Goolsbee pledged for “many cuts” will be needed next year.

The US economy is showing some signs of deceleration, but there are also some signs of the economic activity holding resilient. The Fed has stated that the pace of the easing cycle will depend on the incoming data.

On Monday, Fed's Goolsbee stated that rates need to come down adding that “many more rate cuts” will be needed. On the other hand, Minneapolis Fed President Neel Kashkari stated that the Federal Reserve is still focused on data to guide its decisions while Bostic commented that the recent half-point rate cut doesn’t establish a pattern for future cuts, also noting that risks to the labor market have grown.

Daily digest market movers: US Dollar stays green after PMI data

• Composite S&P PMI expanded at a slower pace of 54.4 in September, down from 54.6 in August.
• Manufacturing PMI unexpectedly declined to 47.0, while the services PMI expanded at a better-than-projected 55.4.
• Market continues to veer toward a dovish Fed, pricing in 75 bps of easing by year-end.
• Traders will keep an eye on incoming Fed comments and if incoming data would justify a 50 or 75 bps cut.
• US Dollar is likely to remain vulnerable until the market reprices Fed expectations. Incoming data will be key.

DXY technical outlook: Bulls remain weak and go nowhere

The DXY index has shown some momentum, but indicators remain in a bearish zone. The Relative Strength Index (RSI) is at 40, indicating weak buying pressure. The Moving Average Convergence Divergence (MACD) is displaying diminishing green bars, further supporting the bearish trend.

Supports are located at 100.50, 100.30 and 100.00. Resistance levels are found at 101.00, 101.30 and 101.60. The DXY index is likely to face resistance at these levels if it continues to rise. Conversely, if it falls below the support levels, it could signal further weakness.

US Dollar FAQs

What is the US Dollar?

The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.

How do the decisions of the Federal Reserve impact the US Dollar?

The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.

What is Quantitative Easing and how does it influence the US Dollar?

In extreme situations, the Federal Reserve can also print more Dollars and enact 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 when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.

What is Quantitative Tightening and how does it influence the US Dollar?

Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.