US Dollar edges lower following strong NFPs
- The DXY rose by more than 0.80% to 103.90 on Friday
- US Nonfarm Payrolls came in higher than expected for January.
- US bond yields are sharply increasing as markets push to May the start of the easing cycle.
The US Dollar (USD) rose to 103.90 on Friday’s Dollar Index (DXY) chart, mainly fueled by a promising labor market report that has convinced markets a March rate cut is not in the cards.
Fed Chair Powell reinforced the idea that a rate cut in March is unlikely despite ongoing market speculation. In line with that, he stated that the bank will monitor incoming data to set the timing of the easing cycle. As the US labor market remains tight, the bank might consider delaying rate cuts.
Daily digest market movers: US Dollar rallies as markets digest strong labor market data
- Unemployment for January held steady at 3.7%, lower than the 3.8% expected.
- Nonfarm Payrolls increased significantly, surpassing expectations for January. A reported 353K additional jobs were created in the US against a projected 180K, indicating robust job market growth.
- Average Hourly Earnings for January, as per US Bureau of Labor Statistics, were up by 0.6% MoM, exceeding the consensus of 0.3%.
- Annual Average Hourly Earnings for 2024 arrived at 4.5%, surpassing the previous 4.4%.
- US bond yields sharply rose with 2-year, 5-year and 10-year bonds trading at rates of 4.38%, 4.00% and 4.05%, respectively.
- According to the CME FedWatch Tool, the odds of a cut in March plummeted to 20%.
Technical Analysis: DXY bulls show resilience and jump above the 200-day SMA
The indicators on the daily chart indicate a dominance of buying pressure, despite some contrasting signals. The Relative Strength Index (RSI) gliding on a positive slope and in positive territory suggests a build-up of buying momentum, which is further solidified by the rising green bars of the Moving Average Convergence Divergence (MACD). However, mixed signals emanate from the Simple Moving Averages (SMAs). Although the index is above both the 20-day and 200-day SMAs, signifying a bullish outlook, it remains below the 100-day SMA, indicating a bearish hindrance.
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.