US Dollar eases under pressure from confident ECB and hawkish rate cut

The US Dollar falls further after ECB's hawkish rate cut.
Markets also see weekly Jobless Claims tick up
The US Dollar Index barely above 104.00 after paring gains on Wednesday.

The US Dollar (USD) edges lower on Thursday as markets see the the European Central Bank (ECB) issuing a policy rate cut by 25 basis points, though making it a hawkish one by not committing to any next moves. The ECB has thus made its first rate cut after its hiking cycle started post-pandemic to tame inflation, with traders looking for clues on what this could mean for the US, the Federal Reserve (Fed) and the Greenback. Normally a rate cut would mean devaluation for the local currency, in this for the Euro, though a 'one-and-done' message could form a knee jerk reaction in the markets and be perceived as very hawkish.

On the economic front, besides the ECB meeting, weekly US Jobless Claims are on the forefront ahead of the Nonfarm Payrolls number on Friday. Traders are having difficulties digesting data from the US that point to diverging conclusions after strong Services Purchasing Managers Index numbers (PMI) on Wednesday defied the downbeat Manufacturing data released on Monday. The Challenger Job Cuts report for May might shed some light on how labor demand is holding up.

Daily digest market movers: Lagarde finally delivers

The Challenger Job Cuts report for May, came in at 63,816 against 64,789 previous.
At 12:15 GMT, the European Central Bank has made its 25 basis point cut, putting its monetary policy rate from 4% to 3.75%.
While markets were still digesting the ECB rate decision, nearly all US data points for this Thursday were released:
- Initial Jobless Claims jumped from 221,000 to 229,000. Continuing Claims ticked up as well from 1.790 million to 1.792 million.
- Goods Trade Balance posted a deficit of $99.4 billion in March and saw a marginal move in April to $99.2 billion. Goods and Services went from a deficit by $68.6 billion to $74.6 billion.
- Nonfarm Productivity in the first quarter grew by 0.2%, slower than the 0.3% seen in the previous quarter.
At 12:45 GMT, ECB President Christine Lagarde has comment on the rate decision. Overall the outlook from the ECB paints a positive picture for the Eurozone growth outlook and stable inflation levels.
Equities are in the green in Europe across the board, welcoming the 25 basis point rate cut. US futures are still looking for direction.
According to the CME Fedwatch Tool, Fed Fund futures pricing data suggests a 31.4% chance for keeping rates unchanged in September, against a 56.8% chance for a 25 basis points (bps) rate cut and a 11.3% chance for an even 50 bps rate cut. An interest rate hike is no longer considered an option. For the upcoming meeting on June 12, futures are fully pricing that rates will remain at current levels.
The benchmark 10-year US Treasury Note trades around 4.29%, near the fresh monthly low from Wednesday at 4.27%.

US Dollar Index Technical Analysis: Fed rate cut for September odds grow by the day

The US Dollar Index (DXY) is set to move, and the bias is to the downside. The main driver will come from comments from the ECB as – although a rate cut is priced in – this does not mean that substantial US Dollar strength might emerge. Should the ECB remain at its stance of being data dependent and push back against odds for another cut in July or September, markets might push the Euro higher, and therefore see the Greenback devalue further.

On the upside, the DXY first faces double resistance in the form of the 200-day Simple Moving Average (SMA) at 104.43 and the 100-day SMA at 104.42. Next up, the pivotal level near 104.60 comes into play. For now, the topside is forming around 105.00, with the 55-day SMA coinciding with this round number and the peak from recent weeks at 105.12.

On the downside, the 104.00 big figure looks to be holding. Once through there, another decline to 103.50 and even 103.00 are the levels to watch. With the Relative Strength Index (RSI) still not oversold, more downsides are still under consideration.

ECB FAQs

What is the ECB and how does it influence the Euro?

The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region. The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.

What is Quantitative Easing (QE) and how does it affect the Euro?

In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.

What is Quantitative tightening (QT) and how does it affect the Euro?

Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.

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