Last week, the US Dollar Index (DXY), which measures the strength of the US dollar, continued to fall as a result of the Federal Reserve’s decision, weaker consumer confidence, flash PMI manufacturing data and declining inflation. The index dropped to $100.4, a drop of over 5.7% compared with its peak this year, and 12% below 2022’s high.
The odds of further Fed cut rise
Federal Reserve’s decision to begin cutting interest rates in this month was the main factor for the US Dollar index decline.
Officials decided in a two-week meeting to reduce rates by 0.5%, which was higher than most analysts expected. Fed officials such as Raphael Bostic and Neel Kazhkari supported further rate reductions in subsequent statements.
Some Fed officials, however, have recommended caution and that the Fed should reduce rates gradually. Alberto Musalem argued in an interview with the FT that cutting rates aggressively could lead to overheating of financial conditions and a rise in inflation.
The Fed can still make more cuts at its next two meetings this year, according to the economic data released by the Fed last week.
S&P Global reports that US manufacturing was below 45 last September, and it has been at this level for the past several years. There are indications that this sector is not too upset by President Biden’s industrial policy.
A new report from the Conference Board shows that in September, consumer confidence dropped to its lowest level in over three years. Many people expressed concern about the increasing unemployment rate.
There are also signs of a decline in inflation. The Bureau of Economic Analysis reported that personal consumption expenditures (PCE) had fallen to 2.2%. This was a much larger drop than analysts expected.
PCE is a very important gauge of inflation because unlike consumer price indexes (CPI), PCE takes into account price variations in both rural and urban areas. The Fed also uses it as its preferred inflation indicator.
Other signs indicate that inflation is likely to continue declining. One of the signs that inflation will continue to fall is the drop in crude oil prices. Brent and West Texas Intermediate have both fallen below $70, while WTI has reached $68, respectively.
US NFP data ahead
Next, the US Nonfarm Payrolls data will play a major role in determining the direction of the US Dollar Index.
The data is expected to show that in September the NFP was 144k, an increase from the previous months’s 142k. The unemployment rate was unchanged at 4,2%, while average earnings per hour rose by 3.4%.
This is important because the Fed’s focus has now shifted from the inflation rate to the labor markets. It hopes these rate reductions will stimulate the economy and lead to more employment without stimulating inflation.
Central banks take other actions
In the last few weeks, other central banks’ decisions have also affected the US dollar index.
In its last meeting, the Bank of England decided to keep interest rates at 5%. The European Central Bank (ECB), Bank of Canada and Swiss National Bank all cut rates in this month.
These currencies are now significantly stronger against the US Dollar. EUR/USD reached 1.1215 as its highest level since July 19, last year.
The GBP/USD has also surged up to 1,3427. This is its highest point since February 2022 and it’s 29% higher than its low in 2022.
The Swiss Franc is now at 0.8400, the lowest level since December of last year. It’s also 17% lower than its year-todate high.
Dollars have also fallen against emerging markets currencies such as the South African rand (Rand), Chinese Yuan and Indonesian Rupiah.
US Dollar Index Analysis
DXY Chart by TradingView
On the weekly chart, we can see that at $106,40 the DXY Index formed a chart double-top pattern. This is a popular pattern for bearishness in most times. The price has moved below the neckline of the double top at $100.60. This was its low swing from December. It has now moved slightly below the neckline of the double-top at $100.60, its lowest swing since December last year.
The Percentage Price Oscillator and Relative Strength Index have also continued to fall. The US dollar is likely to continue its downward trend as buyers target $989, which represents the 61.8% point of retracement.
The COINPAPER published this post US Dollar Index (DXY), as the focus switches to NFP Data.
