US Dollar dives lower as ISM contracts on key segments

The US Dollar fully pairs back earlier gains and heads lower as US ISM contracts
Traders already sent the Greenback lower at the start of the US trading session.
The US Dollar Index slides back below 103.00, but stays in the middle of a one-month range.

The US Dollar (USD) is seeing all its efforts evaporate as the US session is taking over from the European one, with a full reversal of gains after some US economic data points. Markets meanwhile remain convinced that the US Federal Reverse and its Chairman Jerome Powell will deliver only one interest-rate hike and be done with the tightening cycle, even as he said multiple times last week that the Fed is committed to do at least two. On Monday, the Greenback advances again against most currencies after the firm correction on the back of PCE numbers on Friday.

Monday features a very short trading day ahead as traders will head out for the July 4 US national holiday. Bond trading and the New York Stock Exchange (NYSE) will close at 17:00 GMT and will remain shut on Tuesday. This means that the regular economic calendar is very condensed toward the end of the week with the US Jobs report (NFP) on Friday. A batch of data from the Institute for Supply Management (ISM) with focus on the Manufacturing sector came out and points to a further contraction as the main component slides from 46.9 to 46.0 while an uptick to 47.2 was expected.

Daily digest: US Dollar retreats on the back of economic data

Around 13:00 GMT the Greenback is erasing its gains against most pairs and in some cases even flips into a loss at the start of the US session. The relentless selling of the Greenback on Friday looks to be starting again at the cusp of the US trading session.
With July 4 being a US national holiday, bear in mind that volume will be thinner as normal, with most exchanges in the US closing earlier and only offer a half-day of trading. The main New York Stock Exchange for example will already close at 17:00 GMT.
Russia will cut oil expert by 500,000 barrels per day, together with Saudi Arabia that will cut 1 million barrels per day.
China to limit exports of metals used in chips.
US Treasury Secretary Janet Yellen is set to head to China July 6-9 in order to underpin and build trust and collaboration between the two nations.
The S&P Global Manufacturing Purchasing Manager Index (PMI) data for June came in unchanged at 46.3. This number was the final reading for June.
The ISM Manufacturing numbers come in as a big disappointment with the headline PMI coming at 46.00, while 47.2 expected, from 46.9. The New Orders Index jumped to 45.60 from 42.6 and ISM Employment slid lower to 48.1, from 51.4.
Equities are firmly in the green in Asia. The Hang Seng jumps over 2% near its closing bell, while Japan already closed up 1.41% on Monday. European stocks are under a bit of pressure after Apple issued a warning that it needs to cut Vision Pro Headset production forecast models because of some production issues. US Equity Futures are in the red as the Dow Jones futures are pointing to firm red opening.
The CME Group FedWatch Tool shows that markets are pricing in a 87.4% chance of a 25 basis points (bps) interest-rate hike on July 26. The dislocation between market expectations and what the Fed has been communicating in terms of number of rate hikes is still persistent and could trigger a stronger US Dollar once markets get to the point of realisation.
The benchmark 10-year US Treasury bond yield trades at 3.81% and is not really making any big waves this Monday. Normally it should be a steady session for the US T-notes as bond trading will stop early with the US National holiday on Tuesday.

US Dollar Index technical analysis: USD slides lower as US sells Greenback

The US Dollar gives up its earlier gains from the European and Asian session and turns red as US Dollar selling picks up speed with the US session in play. The US Dollar Index (DXY) snaps back below 103 as a big figure and psychological level. In terms of positioning, it should not be a coincidence that the DXY is near the middle of a one-month-range and might stay around that point in a wait-and-hold pattern before choosing sides on the back of the US job report (NFP) on Friday.

On the upside, look for 103.54 as the next key resistance level which falls in line with the high of last week. The 200-day Simple Moving Average (SMA) at 104.94 is still quite far away. So the intermediary level to look for is the psychological level at 104.00 and May 31 peak at 104.70.

On the downside, the 55-day SMA near 102.72 has proven its importance as it clearly underpinned price action on Friday by triggering a turnaround after the firm weakening of the Greenback. A touch lower, 102.50 will be vital to hold from a psychological point of view. In case the DXY slips below 102.50, more weakness is expected with a full slide to 102.00 and a retest of June’s low at 101.92.

US Dollar FAQs

What is the US Dollar?

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.

How do the decisions of the Federal Reserve impact the US Dollar?

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.

What is Quantitative Easing and how does it influence the US Dollar?

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.

What is Quantitative Tightening and how does it influence the 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.

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