US Dollar upbeat as stronger ISM data sets forth a twelfth week of DXY gains

Traders lost the early risk-on sentiment from Monday with US government shutdown avoided over the weekend.
Focal point this week will be right at the end with US Nonfarm Payrolls on Friday.
US Dollar Index’s 11th consecutive weekly gain followed by Monday continuing its trend.

The US Dollar (USD) jumps higher as recent Institute of Supply Management (ISM) numbers are nearly climbing out of previous contractions. Last week was a close call as the US Dollar Index (DXY) was able to lock in its gains only in the last few trading hours. Although the US government shutdown might be solved for now, with the US Congress pushing the budget showdown to November, the can has merely been kicked down the road for roughly six weeks.

On the data front, the current stance of the US Federal Reserve got confirmed yet again with the Personal Consumption Expenditures (PCE) index on Friday. Although headline PCE saw energy adding to inflation, the Core numbers pointed to further abating inflation. The fresh numbers from the Institute of Supply Managament (ISM) reveals that the US economy is still in a soft landing with all elements jumping higher and are nearly out of contraction.

Daily digest: US Dollar faces chunky week

A surprise to the supside from the S&P Global Manufacturing Purchase Managers Index for September. The final reading went from 48.9 to 49.8.
The Institute of Supply Management (ISM) printed some upbeat surprises for September: Employment went from 48.5 to 51.2. New Orders went from 46.8 to 49.2. The Purchasing Managers Index (PMI) flirted with a break out of contraction from 47.6 to 49. The Prices Paid element dropped from 48.4 to 43.8.
Markets are expecting to hear from Federal Reserve Chairman Jerome Powell and Patrick Harker from the Philadelphia Fed near 15:00 GMT.
The US Treasury is scheduled to auction a 3-month and 6-month bill at 15:00 and 15:30 GMT.
More Fed speakers round up this eventful Monday with John Williams from New York at 17:30 GMT and Loretta Mester from Cleveland at 23:30 GMT.
Equities are slightly in the red in Japan with both the Topix and the Nikkei 225 dropping, less than 0.50%. European equities have lost the positive spirit and are in the red over 0.50% with US futures pointing to a red opening.
The CME Group FedWatch Tool shows that markets are pricing in a 69.2 % chance that the Federal Reserve will keep interest rates unchanged at its meeting in November. The sudden drop from the previous 81.7% comes with the print in PCE where a few elements saw inflation ticking up again.
The benchmark 10-year US Treasury yield jumps to 4.63%, from earlier this Monday at 4.60%. With the US government shutdown out of the way, traders are pushing yields higher again.

US Dollar Index technical analysis: ISM saves the day

The US Dollar Index booked its eleventh straight weekly gain on Friday. Although this US Dollar is firmly in the green again, several banks are mentioning they are seeing US Dollar selling within this rally. With a chunky batch of data set to come out this week, including the US jobs report on Friday as cherry on the cake, the DXY might see its rally come to an end.

The US Dollar Index opened around 106.21, though the overheated Relative Strength Index (RSI) is acting up again and heads back into an overbought regime. Traders that want to hit a new 52-week high need to be aware that a lot of road needs to be covered toward 114.78. Rather look for 107.19, the high of November 30, 2022, as the next profit target on the upside.

On the downside, the recent resistance at 105.88 should be seen as first support. Still, that barrier has just been broken to the upside, so it isn’t likely to be strong. Instead, look for 105.12 to do the trick and keep the DXY above 105.00.

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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