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Market update: US dollar propelled higher on string of strong data, Fed speakers next


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The US dollar eases after strong payroll and ISM services PMI data suggest economic resilience, potentially delaying Fed rate cuts.

 

original-size.webpSource: Bloomberg

 

Written by: Richard Snow | Analyst, DailyFX, Johannesburg
 
Publication date: 

Economic data and Fed speakers to provides tailwind for the dollar

The dollar is slightly softer at the time of writing, but is coming off a massive two-day advance after Friday’s non-farm payroll report revealed a significant beat to the upside. The labour market not only looks robust but appears to be in the ascendancy, after the December figure received a massive revision higher.

Further evidence of a resilient economy, despite restrictive monetary policy, appeared via the ISM services PMI readings below. The headline reading beat the forecast of 52 as well as the prior 50.5, continuing the expansion in the services sector for 13 straight months now.

 

original-size.webpSource: DailyFX

Some of the more interesting stats appear within the sub-sections of the report like ‘new orders’, ‘prices’ and ‘imports’ which all saw notable improvements. New orders is often used as a proxy for future economic conditions; the increase in prices suggests increased costs of shipping in the Red Sea is being passed down to the consumer. Imports posted the largest month-on-month percentage change of all the categories, and suggests consumption and spending are strong.

original-size.webp

 

 

In addition, a lesser observed report called the Senior Loan Officer Survey (SLOOS) revealed that credit providers are less reluctant to extend credit (greater supply) while demand for credit made marginal progress. The report was a main focus around the time of the regional banking instability and has come back onto the radar again after New York Community Bancorp had to cut its dividend – sending other regional bank shares lower with it.

Economic strength defies interest rate pressures, influencing Fed decisions and dollar dynamics

The above data is not consistent with an economy that ought to be constrained by elevated interest rates – suggesting that the start of rate cuts may need to be pushed back even further. As such, US yields and the dollar have risen in recent sessions.The dollar basket (DXY) is viewed as a benchmark of broader dollar performance and witnessed massive gains on Friday, which continued into Monday. Today however, prices have eased back a tad, ahead of the 104.70 level which has acted as support in September and November 2023.

The Fed’s very own Neel Kashkari seemed surprised at the US economy’s strength, suggesting that the current level of interest rates is not having as much of an impact as would typically be the case if the neutral rate hadn’t been shifted higher. The neutral rate is a theoretical rate that is neither restrictive of supportive to the economy and is said to be higher in the post-Covid period.

Price action remains above the 200-day simple moving average and could continue with the help of additional Fed speakers who are lined up today to provide their thoughts on monetary policy and interest rates. Further talk about the impressive economic data and the need to move cautiously before deciding to cut rates could add to the recent USD advance.

US dollar basket (DXY) daily chart

 

Source: TradingView

 

 

 

This information has been prepared by IG, a trading name of IG Australia Pty Ltd. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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