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25 Apr 2024
US Dollar finds footing with mild gains following GDP and labor market data
- US Q1 GDP reveals reduced expansion at 1.6% YoY.
- On the positive side, weekly Jobless Claims come in strong.
- Friday’s PCE data from March will dictate the pace of DXY in the short term.
The US Dollar Index (DXY) is seen trading mildly down at 105.75 on Thursday and struggling to gain more ground following its extended rally in April. The Index weakened following Gross Domestic Product (GDP) data from Q1, but losses may be limited after strong labor market data was reported during the European session.
The US economy remains resilient but is expected to grow at a slower pace due to inflation and higher interest rates. The Federal Reserve (Fed) remains firm on its stance and seems to not want to rush to start easing and market hawkish adjustments provide a cushion to the USD. Personal Consumption Expenditures (PCE) data from March will likely affect those investors’ expectations.
Daily digest market movers: DXY down after GDP data
- The Bureau of Economic Analysis’s (BEA) initial estimate revealed a 1.6% YoY annualized expansion in the US Gross Domestic Product (GDP) for January-March.
- GDP figures were below market predictions of a 2.5% annual rise, lagging behind 3.4% YoY growth in Q4 2023.
- The US Department of Labor showed a decrease of 5K in Initial Jobless Claims for the week ending April 20, resulting in a total of 207K Initial Jobless Claims.
- The weekly decline in Initial Jobless Claims surpassed market forecasts, which projected 214K claims, a clear improvement from the prior week's total of 212K.
- Regarding expectations on the Fed, markets bet on 20% odds of a June rate cut. A potential Fed rate cut in July or even September isn't fully assumed either, pointing to strong confidence in ongoing US economic performance that justifies the delay of the easing cycle.
DXY technical analysis: DXY shifts into neutral gear, bears lurk despite bullish undertones
The indicators on the daily chart portray a mixed stance for the DXY. The flat position of the Relative Strength Index (RSI) in positive territory resonates with stagnant buying momentum. Moreover, the decreasing green bars of the Moving Average Convergence Divergence (MACD) reflect a fading bullish sentiment, signaling potential weakness in the near future.
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.