- The US Dollar is trading higher at the start of the US trading session.
- European PMIs fell sharply in September, but the U.S. PMI is holding up so far.
- The US Dollar Index rises and tries to recover the 101.00 mark.
The US Dollar (USD) is set to maintain gains already recorded in early Monday trading during European trading hours. The US Dollar saw substantial inflows as traders fled from the Euro, which was hit by sharp declines in German and French Purchasing Managers' Indexes (PMIs). The US PMIs appear to be holding up even with the services sector coming in just slightly above expectations.
In terms of economic data, a comparison was made between Europe, the UK and the US for both the services and manufacturing sectors. Europe is lagging behind, with both sectors in deeper contractions or at least on the verge of contraction. The UK and US PMIs are outperforming the European PMI, resulting in a weaker euro and a positive US dollar.
Daily Digest Market Trends: Gloomy Europe
- Provisional US S&P Global PMI figures for September have been released.
- Data for the services sector came in at 55.4, beating the expected 55.2 and slightly weaker than the previous reading of 55.7.
- The manufacturing index came in at 47, below the expected 48.5 and from the previous reading of 47.9.
- The composite index rose to 54.4 from 54.6 the previous month.
- Speakers from the Federal Reserve are expected to make some comments on the current stance of monetary policy.
- At 12:00 PM GMT, Raphael Bostic, president of the Federal Reserve Bank of Atlanta, spoke virtually at the London Centre for European Economics and Finance's distinguished guest seminar on the U.S. economic outlook. Bostic acknowledged that he supports a 50 basis point rate cut, but did not specify how big a cut he would make.
- At approximately 2:15 p.m., Federal Reserve Bank of Chicago President Austan Goolsbee delivered a speech on monetary policy and the U.S. economy at the annual conference of the National Association of State Treasurers in Chicago.
- At around 6pm GMT, Federal Reserve Bank of Minneapolis President Neel Kashkari took part in a question-and-answer session hosted by the Greater Kansas City Chamber of Commerce at the Science Museum of Minnesota.
- In Europe, stock markets are beginning to improve on the belief that the European Central Bank (ECB) will need to cut interest rates further and become more dovish to support growth, which is seen as a positive for the stock market. European stocks are up less than 0.50% on the day, and US stocks are also doing well.
- The CME Fedwatch tool indicates a 50.6% chance of a 25 basis point rate cut at the next Fed meeting on November 7, with a 49.4% chance of a further 50 basis point cut.
- The 10-year U.S. Treasury yield was trading at 3.78, its highest in two weeks.
US Dollar Index Technical Analysis: Data-driven Moves
Last week, when the Fed cut interest rates by 50 basis points, the US Dollar Index (DXY) looked like it had no hope of rising. This week, the US Dollar may try to make a comeback. PMIs released on Monday will paint a very different picture for traders to consider. Europe's performance may be much bleaker than the US, meaning the US Dollar is worth a lift (up) to the levels it traded at last week.
The upper limit of the September range remains at 101.90. Further upside could see the index rise to 103.18, with the 55-day simple moving average (SMA) at 102.59 along the way. The next upside is very uncertain, with the 100-day SMA at 103.71 and the 200-day SMA at 103.78, just ahead of the big 104.00 round level.
On the downside, 100.62 (December 28, 2023 low) may provide initial support and signal further weakness. If so, the July 14, 2023 low of 99.58 is the next level to watch. If this level breaks down, early 2023 levels could be near 97.73.
US Dollar Index: Daily Chart
ECB Frequently Asked Questions
The European Central Bank (ECB), located in Frankfurt, Germany, is the reserve bank for the eurozone. The ECB sets interest rates and manages monetary policy for the eurozone. The ECB's main mission is to maintain price stability, which means keeping inflation at around 2%. Its main means of achieving this is by raising or lowering interest rates. Relatively higher interest rates usually lead to a stronger euro and vice versa. The ECB Governing Council decides monetary policy at its eight meetings a year. Decisions are made by the heads of the eurozone national banks and the six permanent members, including ECB President Christine Lagarde.
In extreme circumstances, the European Central Bank can implement a policy tool called quantitative easing. Quantitative easing is the process in which the ECB prints euros and uses them to buy assets (usually government or corporate bonds) from banks and other financial institutions. Quantitative easing usually results in a weaker euro. Quantitative easing is a last resort when simply lowering interest rates may not be able to achieve the objective of price stability. The ECB used quantitative easing during the Great Financial Crisis of 2009-2011, in 2015 when inflation remained stubbornly low, and during the COVID-19 pandemic.
Quantitative tightening (QT) is the opposite of QE. It is implemented after QE when the economic recovery is underway and inflation starts to rise. In QE, the European Central Bank (ECB) provides liquidity by purchasing government and corporate bonds from financial institutions, but in QT, the ECB stops buying bonds and stops reinvesting the principal of maturing bonds it already holds. This is usually positive (or bullish) for the euro.
