The US Dollar (USD) lost its strength in the American session on Monday but didn’t have difficulty holding its ground. The US Dollar Index (DXY), which tracks the USD’s valuation against a basket of six major currencies, stayed near 104.00 on Tuesday as investors refrained from committing to prominent positions during the Federal Reserve’s (Fed) blackout period.
The monthly data published by the ISM showed that the business activity in the US service sector continued to expand in May, albeit at a softer pace than it did in April. The ISM Services PMI declined to 50.3 in May from 51.9 in April and missed the market expectation 51.5.
Daily Digest Market Movers: US Dollar Stabilizes On Tuesday
- Further details of the ISM PMI report revealed that the Prices Paid Index edged lower to 56.2 from 59.6, and the Employment Index dropped to 49.2 from 50.8.
- Commenting on the data, “there has been a pullback in the rate of growth for the services sector,” noted Anthony Nieves, Chair of the Institute for Supply Management (ISM) Services Business Survey Committee. “This is due mostly to the decrease in employment and continued improvements in delivery times (resulting in a decrease in the Supplier Deliveries Index) and capacity, which are in many ways a product of sluggish demand.”
- The US Census Bureau announced Monday that Factory Orders rose 0.4% in April, following the 0.9% increase recorded in March.
- US stock index futures trade modestly lower early Tuesday, and the benchmark 10-year US Treasury bond yield stays in negative territory below 3.7% following Monday’s slide.
- According to the CME Group FedWatch Tool, markets are pricing in a more than 80% probability of the Fed leaving its policy rate unchanged at the upcoming meeting.
- The monthly data published by the US Bureau of Labor Statistics (BLS) showed on Friday that Nonfarm Payrolls rose 339,000 in May. This reading surpassed the market expectation of 190,000 by a wide margin. April’s reading of 253,000 also got revised higher to 294,000.
- The underlying details of the labor market report revealed that the Unemployment Rate climbed to 3.7% from 3.4% in the same period. The Labor Force Participation rate remained unchanged at 62.6%, while annual wage inflation, as measured by the change in Average Hourly Earnings, edged lower to 4.3% from 4.4%.
- Commenting on the US jobs report, “Is the US economy experiencing a soft landing? According to the latest Nonfarm Payrolls, the job market is slowing down to a “Goldilocks level” – not too hot nor too cold,” said FXStreet Analyst Yohay Elam. “For markets, it means ongoing growth but with lower inflation and interest rates. For the US Dollar, the path of least resistance is down.”
- “There are likely enough pockets of softness in this report for the FOMC to pass on raising rates at the next meeting, though another strong payrolls gain in June, coupled with another disappointing inflation report, could set the stage for a rate increase in July,” economists at the Bank of Montreal said regarding the potential impact of the labor data on the Fed’s policy outlook.
Technical Analysis: US Dollar Index Holds Above Key Technical Level
The US Dollar Index (DXY) trades slightly above 104.00, where the Fibonacci 23.6% retracement of the November-February downtrend is located. In the meantime, the Relative Strength Index (RSI) indicator on the daily chart stays comfortably above 50, suggesting that sellers remain hesitant.
104.50 (static level) aligns as the first resistance for DXY ahead of 105.00 (psychological level). A daily close above the latter could bring in additional buyers and open the door for an extended rebound toward 105.60 (Fibonacci 38.2% retracement, 200-day Simple Moving Average (SMA)).
On the downside, bearish pressure could increase if DXY closes the day below 104.00. In that scenario, 103.50 (static level) could be considered initial support before 103.00 (100-day SMA).