US Dollar dives after disappointing July jobs report
- US Dollar suffers following July's disappointing jobs report, which sparks increased expectation in September rate cut.
- If data continues to show progress, the Fed signals readiness to respond to signs of weakness in the US economy.
- CME FedWatchTool indicates a 90% chance of a cut in September.
The US Dollar (USD), as gauged by the DXY index, experienced heavy selling pressure following the July jobs report on Friday, sliding to lows not seen since March near 103.20.
With a September rate cut seemingly in sight, any signs of vulnerability in the US economic landscape could weigh on the USD and increase dovish sentiment toward the Federal Reserve (Fed).
Daily digest market movers: The US Dollar dips on July's weak jobs growth
- US Nonfarm Payrolls (NFP) grew by just 114K in July, falling short of the market expectation of 175K and significantly below June's downwardly revised growth of 179K (from 206K), according to the US Bureau of Labor Statistics (BLS) report on Friday.
- Additional figures from the report showed that the Unemployment Rate inched up to 4.3% in July from 4.1% in June.
- Concurrently, Average Hourly Earnings' annual wage inflation decreased to 3.6% from 3.8%.
- The weak demand for labor in the US, underscored by these figures, has piled pressure on the USD, increasing expectations that the Fed will start to cut interest rates in September.
- The CME FedWatch Tool now shows that traders predict a 90% chance of a half-point Fed rate cut in September.
DXY technical outlook: Index outlook turns bearish amid concerning data
The DXY outlook has taken a turn for the worse after the disappointing jobs report. The index slid significantly below both the 20-day and 200-day Simple Moving Averages (SMAs), which are on the brink of a bearish crossover near 104.00.
The momentum-based Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD) also took substantial hits, indicating a surge in selling pressure.
The DXY index now finds support at 103.00, 102.50 and 102.30, with resistance levels positioned at 103.50 and 104.00.
US Dollar FAQs
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.
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.
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.
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.
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