- The US Dollar is exhibiting positive momentum as traders carefully analyze the recent disappointing Dallas Fed Manufacturing Survey data.
- The current US administration is reportedly setting aside negotiation attempts with China, prioritizing discussions with other nations initially.
- The US Dollar Index remains constrained below the key psychological level of 100.00, trading near 99.40 during Tuesday’s session.
The US Dollar Index (DXY), a measure of the US Dollar’s (USD) value against a basket of six major currencies, is experiencing a slight upward movement, currently trading at 99.35 as of Tuesday. Market participants are still assessing the implications of the Dallas Federal Reserve’s (Fed) April Manufacturing Sentiment Index released on Monday. The index contracted sharply to -35.8, a level unseen since the height of the COVID-19 pandemic. The accompanying report included notable comments from survey participants, highlighting the prevailing economic anxieties.
Respondents used strong language such as “chaos” and “insanity” to describe the disruptions caused by the tariffs imposed under the current administration. This paints a vivid picture of the challenges facing businesses under the existing trade policies. Consequently, US Treasury yields are declining as traders increase their bets on the Federal Reserve potentially cutting interest rates sooner than anticipated. This expectation is fueled by the possibility that upcoming US economic data this week, including the preliminary Q1 Gross Domestic Product (GDP) figures and the April Nonfarm Payrolls (NFP) report, could mirror the concerning trends indicated by the Dallas Fed Manufacturing data. The market is anticipating a potential slowdown in economic activity, prompting speculation about a more dovish stance from the Federal Reserve.
The economic calendar for Tuesday features some less impactful data releases, with the primary focus on the JOLTS Job Openings report for March. While this data is backward-looking, predating the full implementation of the current trade measures, it could offer insights into whether US companies were already anticipating potential disruptions and adjusting their hiring strategies accordingly. Additionally, the preliminary US Goods Trade Balance for March is also scheduled for release.
Daily Digest: Market Volatility Poised for Another Peak
- The preliminary US Goods Trade Balance for March is scheduled for release at 12:30 GMT. No consensus forecast is currently available; the previous deficit stood at $147 billion. A widening deficit could put downward pressure on the US Dollar.
- Preliminary Wholesale Inventories for March are also due at 12:30 GMT, with expectations of a 0.7% increase, slightly higher than the 0.3% rise recorded in February. An increase in inventories could suggest businesses are anticipating future demand.
- The February House Price Index is slated for release at 13:00 GMT. Expectations are for a 0.3% increase, marginally up from the 0.2% gain in February. Continued growth in house prices could indicate a resilient housing market.
- At 14:00 GMT, the JOLTS Job Openings report for March is anticipated to show a further contraction to 7.5 million, down from the previous reading of 7.568 million. The Consumer Confidence Index for April is also due, although no forecast is currently available. A decline in job openings and consumer confidence could signal a weakening economy.
- Equity markets are displaying stability with modest gains overall, averaging below 0.5% for both European indices and US Futures markets. This suggests a cautious optimism among investors.
- The CME FedWatch Tool indicates an 8.9% probability of an interest rate cut by the Federal Reserve at its May meeting, compared to a 91.1% probability of no change. The probability of a rate cut at the June meeting is currently priced at 62.6%. These figures reflect the market’s evolving expectations regarding the Fed’s monetary policy stance.
- The US 10-year Treasury yield is trading around 4.23%, experiencing a slight decrease as traders gradually increase their purchases of US bonds. This indicates a potential shift towards safe-haven assets amid economic uncertainty.
US Dollar Index Technical Analysis: Consolidation Phase with Underlying Tensions
The US Dollar Index (DXY) is currently exhibiting a period of consolidation as traders await key US economic data releases later in the week. Geopolitical developments, including conflicting reports regarding potential tariff adjustments with China and other nations, are contributing to market uncertainty. The recent Dallas Fed Manufacturing survey could be an early indication of a potential slowdown in US economic performance, potentially prompting the Fed to implement interest rate cuts and leading to a weaker US Dollar in the short term, before a possible recovery in US economic indicators.
From a technical perspective, the DXY faces initial resistance at 100.22, a level that previously provided support in September 2024. A decisive break above the psychological level of 100.00 would be considered a bullish signal. A sustained recovery could target 101.90, a level that served as a pivotal point throughout December 2023 and as the base for an inverted head-and-shoulders pattern during the summer of 2024.
Conversely, the 97.73 support level could be tested rapidly in response to any significant negative news. A breach of this level could lead to a test of the relatively weak technical support at 96.94, before potentially targeting lower levels within the current trading range, such as 95.25 and 94.56. These lower levels would represent fresh lows not seen since 2022, indicating a significant weakening of the US Dollar.
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.
