US Dollar strengthens following Services PMIs, ADP figures

Jun 5, 2024 4:44 PM

USD extends its gains to second day following mixed signals from ADP, ISM Services PMIs.
Business activity in the US service sector expanded in May, ISM Services PMI showing signs of recovering in April.
Markets gear up for Nonfarm Payrolls and Wage inflation data to give additional insight into US economy.

On Wednesday, the US Dollar Index (DXY) extended its gains despite mixed signals about the US economy. The solid performance of the service sector, coupled with lower-than-expected private sector employment data, caused a moderate stir in the market. However, the overall outlook for the US economy remains resilient.

All eyes are now on the upcoming labor market data such as Nonfarm Payrolls, Wage inflation, and Unemployment numbers on Friday, which will provide deeper insights into the state of the US economy. The markets will closely monitor these cues to readjust their bets on rate cuts from the Federal Reserve (Fed).

Daily digest market movers: DXY extends gains amid mixed economic signals

ISM Services PMI for May recovered to 53.8, exceeding the market expectation of 50.8 and marking considerable growth from April's reading of 49.4.
ADP Employment Change report shows US private sector employment rose by 152K in May.
This increase falls short of the market expectation of 173K and lower than the revised 188K additions in April.
Likelihood of interest rate cuts in June and July remain low, while those odds stand at around 60% for September.

DXY technical analysis: USD rebound is in sight despite underlying bearish sentiment

Even though the DXY index has slipped below the 20,100 and 200-day Simple Moving Averages (SMAs), there have been signals of a possible recovery in the last two sessions. The Relative Strength Index (RSI) has risen but still stays below 50, while the Moving Average Convergence Divergence (MACD) depicts lower red bars, reflecting some buying interest.

Despite the overall negative sentiment in the market, bulls are gradually gaining ground. Should they succeed in recovering the convergence of the lost 100 and 200-day SMAs at 104.40, this would considerably brighten the outlook for the DXY index.

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.

Disclaimer: For information purposes only. Past performance is not indicative of future results.