US Dollar extends uptrend despite uninspiring US data

The US Dollar gathers strength against its rivals to start the month of August.
The US Dollar Index touched its highest level since early July above 102.00.
USD benefits from souring market mood after uninspiring US data releases.

Following Monday's relatively quiet action in financial markets, the US Dollar started to gather strength against its major rivals on the first trading day of August. The USD Index – which tracks the USD's valuation against a basket of six major currencies – climbed to its highest level in three weeks above 102.00 in the European session.

The US economic data came in weaker than expected but the risk-averse market atmosphere allowed the USD to continue to find demand as a safe haven. Moreover, the benchmark 10-year US Treasury bond yield broke above 4%, providing an additional boost to the currency.

Daily digest market movers: US Dollar preserves its strength following US data

The number of job openings on the last business day of June stood at 9.58 million, the US Bureau of Labor Statistics (BLS) reported in the Job Openings and Labor Turnover Survey (JOLTS) on Tuesday. This reading followed 9.82 million openings in May and came in slightly below the market expectation of 9.62 million.
ISM Manufacturing PMI imrpoved modestly to 46.4 in July from 46 in June. This reading came in below the market expectation of 46.8 and showed an ongoing contraction in the manufacturing sector's business activity.
The Employment component of the ISM PMI survey declined to 44.4 from 48.1.
“Banks reported that, on balance, levels of standards are currently on the tighter end of the range for all loan categories. Compared with the July 2022 survey, banks reported tighter levels of standards in every loan category," the Fed said in the July 2023 Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS).
Wall Street's main indexes opened in negative territory on Tuesday. At the time of press, S&P 500 and Nasdaq Composite indexes were down 0.4% and 0.6%, respectively.
The data from China showed that the business activity in the manufacturing sector contracted in July, with the Caixin Manufacturing PMI declining to 49.2 from 50.5 in July.
The ISM reported on Monday that the Chicago PMI improved to 42.8 in July from 41.5 in June.
The Federal Reserve Bank of Dallas' Texas Manufacturing Survey revealed that the headline Manufacturing Business Index edged higher to -20 in July from -23.2 in June.
Inflation in the US, as measured by the change in Personal Consumption Expenditures (PCE) Price Index, fell to 3% on a yearly basis in June from 3.8% in May, the US Bureau of Economic Analysis reported on Friday. This reading came in below the market expectation of 3.1%.
Core PCE Price Index, the Federal Reserve's preferred gauge of inflation, arrived at 4.1% on a yearly basis, down from 4.6% in May and below the market forecast of 4.2%. Further details of the publication revealed that Personal Income and Personal Spending increased 0.3% and 0.5% on a monthly basis, respectively.
The real Gross Domestic Product (GDP) of the US expanded at an annualized rate of 2.4% in the second quarter, the US Bureau of Economic Analysis' (BEA) first estimate showed on Thursday. This reading followed the 2% growth recorded in the first quarter and surpassed the market expectation of 1.8% by a wide margin.
According to the CME Group FedWatch Tool, markets are pricing in a 20% probability of a 25-basis-point Federal Reserve (Fed) rate hike in September.
In an interview with CBS over the weekend, Minneapolis Federal Reserve Bank President Neel Kashkari said that he was not sure whether the Fed was done raising rates. Commenting on the jobs markets, Kashkari noted that it would not surprise him to see the unemployment rate tick up slightly.
The Fed raised its policy rate by 25 basis points (bps) to the range of 5.25%-5.5% following the July policy meeting as expected. In the post-meeting press conference, Fed Chairman Jerome Powell refrained from confirming another rate hike this year and said that every policy meeting will be live. "If we see inflation coming down credibly, we can move down to a neutral level and then below neutral at some point," Powell told reporters, noting that the policy was already restrictive.

Technical analysis: US Dollar Index approaches key resistance

The US Dollar Index (DXY) holds above 102.00 (psychological level, static level) and the Relative Strength Index (RSI) indicator on the daily chart edges higher toward 60 early Tuesday, reflecting a buildup of bullish momentum.

DXY faces next resistance at 102.50 (50-day SMA, 100-day SMA). A daily close above the latter could attract buyers and pave the way for an extended uptrend toward 103.00 (psychological level, static level) and 103.70 (200-day Simple Moving Average).

Looking south, sellers could show interest if DXY fails to hold above 102.00. In that case, 101.30 (20-day SMA) could be seen as next bearish target before 101.00 (psychological level, static level) and 100.50 (static level).

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money.
When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

How often does the Fed hold monetary policy meetings?

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions.
The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

What is Quantitative Easing (QE) and how does it impact USD?

In extreme situations, the Federal Reserve may resort to a policy named 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 during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

What is Quantitative Tightening (QT) and how does it impact the US Dollar?

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.

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