US Dollar gets to keep gains for now after Jobless Claims paint a steady picture

The US Dollar gets support from Kansas Fed President Schmid with hawkish tone.
Focus this Thursday on US PMI's for August to provide some counterweight.
The US Dollar index trades just above 101.00 and could fall to 100.00 if weak sentiment persists.

The US Dollar (USD) trades broadly flat after it saw heavy selling at the start of the US session on Wednesday, triggering another leg lower towards a fresh 2024 low. The Nonfarm Payrolls revision highlighted 818,000 fewer jobs than previously estimated, the largest downward revision in over a decade, confirming market concerns about the US job market. Later, the release of the Fed Minutes for the July meeting confirmed that some members of the Federal Open Market Committee (FOMC) vowed for a rate cut back then, making this move almost certain in September.

Although it looks like nothing can go wrong, big warning signs still need to be issued here. The Federal Reserve and Fed Chairman Jerome Powell have already advocated plenty of times that the risk of cutting too soon is one of their biggest fears. With the preliminary August Purchasing Managers Index (PMI) numbers, any strong figures might dampen the hope for either a big cut in September or further cuts down the line.

Daily digest market movers: Jobless Claims are back to normal

Hit the breaks, no white flag just yet, according to Kansas Fed President Jeffrey Schmid. Schmid said in early US comments that there could still be a pickup in demand and that the overnight Nonfarm Payrolls revisions did not change his stance on monetary policy. The Fed has time to decide and needs to watch more data points first before pulling the trigger, according to Fed's Schmid. A hawkish shift, away from the dovish tone the Fed Minutes delivered on Wednesday.
Markets are having difficulties to read the Purchasing Managers Index numbers from Europe. France saw an uptick in its Services PMIs driven by the Olympic Games taking place, while Germany saw its Services PMIs come in below expectations. The German Manufacturing component even fell further into contraction, which is bad news for Europe’s main economy.
At 12:30 GMT, the weekly US Jobless Claims saw revisions tune down the initial print:
- Initial Jobless Claims went from 228,000 to 232,000. That same 228,000 was last week 227,000.
- Continuing Claims went from 1.864 million last week to 1.863 million for this week. That same 1.864 million got revised down to 1.859 million.
At 13:45 GMT, S&P Global will release the US preliminary PMIs for August:
- The Services index is expected to remain quite stable, falling to 54 from 55 a month earlier.
- The Manufacturing index is not expected to move, remaining in contraction territory at 49.6.
- The Composite index is seen declining to 53.5 from 54.3.
At 14:00 GMT, Existing Home Sales are due to come out. Seeing the recent sharp decline in mortgage applications from the Mortgage Bankers Association data released Wednesday, a decline in Existing Home Sales for July is expected as well. Sales fell by 5.4% the previous month.
The Kansas Fed Manufacturing Activity tracker for August will be released at 15:00 GMT. The previous print was -12.
European and US equities are in good shape again this Thursday, thriving on the dovish Fed Minutes from Wednesday in the assumption several cuts are on their way.
The CME Fedwatch Tool shows a 67.5% chance of a 25 basis points (bps) interest rate cut by the Fed in September against a 32.5% chance for a 50 bps cut. Another 25 bps cut (if September is a 25 bps cut) is expected in November by 39.7%, while there is a 46.9% chance that rates will be 75 bps below the current levels and a 13.4% probability of rates being 100 basis points lower.
The US 10-year benchmark rate trades at 3.82%, off this week's low for now.

Economic Indicator

S&P Global Services PMI

The S&P Global Services Purchasing Managers Index (PMI), released on a monthly basis, is a leading indicator gauging business activity in the US services sector. As the services sector dominates a large part of the economy, the Services PMI is an important indicator gauging the state of overall economic conditions. The data is derived from surveys of senior executives at private-sector companies from the services sector. Survey responses reflect the change, if any, in the current month compared to the previous month and can anticipate changing trends in official data series such as Gross Domestic Product (GDP), industrial production, employment and inflation. A reading above 50 indicates that the services economy is generally expanding, a bullish sign for the US Dollar (USD). Meanwhile, a reading below 50 signals that activity among service providers is generally declining, which is seen as bearish for USD.

US Dollar Index Technical Analysis: Not all pieces of the puzzle

The US Dollar Index (DXY) has been falling like a rock this week and will very likely be unable to avoid a weekly loss. However, traders should refrain from diving in massively in trying to jump on the “sell the dollar” train as there are some elements to keep in the back of one's mind. As it stands, markets are expecting a 75 bps rate cut by November. That is a very big cut considering that the Fed is until this date still data dependent.

In this context, there is a big risk for a sharp upward correction in the DXY to recover some earlier losses. If US PMI numbers remain strong or even tick up further andFed Chairman Jerome Powell says that the Fed still remains data dependent and will want to watch recent data first before considering to start cutting, that would be a huge disappointment for markets. Traders seem to be expecting too many toys from Santa, while Santa might say he will want to wait with his deliveries of gifts in order to be sure that the market has been good enough.

Looking up, the DXY faces a long road to recovery. First, 101.90 is the level to reclaim. A steep 2% uprising would be needed to get the DXY to 103.18 from where it is trading now, around 101.00. A very heavy resistance level near 104.00 not only holds a pivotal technical value, but it also bears the 200-day Simple Moving Average (SMA) as the second heavyweight to cap price action.

On the downside, 100.62 (low from December 28) will be the next vital support in order to avoid another meltdown. Should it break, the low of July 14, 2023, at 99.58 will be the ultimate level to look out for.

US Dollar Index: Daily Chart

Central banks FAQs

What does a central bank do?

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%.

What does a central bank do when inflation undershoots or overshoots its projected target?

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.

Who decides on monetary policy and interest rates?

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%.

Is there a president or head of a central bank?

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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