US Dollar edges lower following Jobless Claims figures

The DXY Index shows losses, trading near the 103.05 area.
Weekly Jobless Claims came in higher than expected.
Markets still digesting Wednesday’s Fed decision and Powell's words.

The US Dollar (USD) is currently trading at 103.05, with a declining trend, largely triggered by the release of soft labor market data on Thursday that outshadowed strong ISM PMIs figures. Markets are still digesting Federal Reserve (Fed) chair Jerome Powell’s words from Wednesday, which helped the index jump toward 103.80.

Fed Chair Powell reinforced the idea that a rate cut in March is unlikely despite ongoing market speculation. Nevertheless, he noted rate adjustments remain primarily data-dependent, with upcoming jobs data setting the pace of the US Dollar and expectations for the short term.

Daily Digest Market Movers: US Dollar declines following weak labor market figures

The ISM Manufacturing PMI for January came in at 49.1, lower than the consensus estimate of 47 but slightly higher than the previous figure of 47.1.
The initial Jobless Claims for the week ending in January 27 reported by US Department of Labor are at 224K, higher than the consensus forecast of 212K and the previous figure of 215K.
Investors are keenly awaiting the January Nonfarm Payrolls report due on Friday to continue placing their bets on the next Fed decisions.
As for now, markets are seeing the easing cycle starting in May, but the odds of a cut in March are still high around 40%, according to the CME FedWatch Tool.
In case Friday’s labor market figures come in weaker than expected, the dovish bets on the Fed may rise, applying further pressure on the USD.

Technical Analysis: DXY bears step in to push the index below 200-day SMA

The indicators on the daily chart are reflecting a tentative dominance of selling momentum in the short term. The Relative Strength Index (RSI), albeit on a negative slope, is holding in positive territory, reflecting dwindling buying momentum. This is further supported by the Moving Average Convergence Divergence (MACD) indicator, which showcases decreasing green bars, an indication that the selling pressure is slowly gaining traction.

Furthermore, the positioning of the index concerning its 20,100 and 200 Simple Moving Averages (SMAs) points to a bullish hold in the broader context. The pair still holds above the 20-day SMA, signaling that the bears have failed to command complete control in the short term. However, the DXY's positioning below the 100 and 200-day SMAs suggests more dominant selling momentum in the longer-term.

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.