US Dollar stands soft as markets await NFPs on Friday

July 4, 2024 9:27 pm

  • US Dollar is under further scrutiny following dismal ADP and ISM Services PMI data
  • Markets firming up their view of a September Fed rate cut.
  • Investors are turning their attention towards the forthcoming Nonfarm Payrolls data from June on Friday.

The US Dollar, represented by the DXY Index, has continued to show weakness as traders assess a series of Wednesday data releases. US traders will remain on the sidelines, celebrating Independence day.

Concerns raised by signs of disinflation and a slowing labor market in the US are being taken into account by market participants, with a September rate cut now seeming more likely. Federal Reserve (Fed) officials are maintaining a conservative stance, however, starting to show concerns about the labor market struggles.

Daily digest market movers: US Dollar softens further amidst poor data, markets prepare for Nonfarm Payrolls

  • With US traders off to celebrate Independence Day, the market is left to digest Wednesday’s data releases.
  • Private sector employment reported by Automatic Data Processing (ADP) came in lower than expected, with an increase of 150K jobs in June versus a forecast of 160K.
  • Additionally, the weekly Jobless Claims came in at 238K, which was above the expected figure of 235 K.
  • The US service sector displayed contraction in June signified by the ISM Services PMI, which hugely missed market expectations of 52.5 by declining to a record low of 48.8 from 53.8 in May.
  • Minutes from the Federal Reserve’s June 11-12 meeting indicated that officials do acknowledge a slowing US Economy and easing price pressures, yet they refrained from any commitment to rate cuts, preferring a cautious data-dependant approach.
  • Investors are now shifting their attention to Friday’s significantly important June Nonfarm Payrolls report. The Bloomberg consensus predicts 190K jobs, dropping from 272K in May, with ‘whisper numbers’ forecasting 198K.

DXY Technical Outlook: DXY experiences further headwinds and loses 20-day SMA

The DXY technical outlook turned negative after the index fell below the 20-day Simple Moving Average (SMA). With both the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) now in negative territory, the market is looking at the potential for further decline towards the 105.00 and 104.50 supports if data continues to disappoint.

Central banks FAQs

Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.

A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.

A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.

Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.

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