US Dollar weak as focus shifts to politics

• US Dollar retreats as United States election uncertainty offsets upbeat service sector data.
• ISM Services PMI surges, signalling accelerating growth in the sector despite ongoing political concerns.
• Trump's election odds affect US Dollar amid expectations of inflationary policies.

The US Dollar Index (DXY), which measures the value of the USD against a basket of six currencies, retreats as uncertainty surrounding the upcoming US presidential election dampens gains from upbeat service sector data. Despite a surge in the ISM Services PMI indicating robust growth, concerns over the election outcome weigh on the Dollar's strength. 

The US Dollar Index has recently declined due to increased probability of Kamala Harris winning the US presidential election and a disappointing October Nonfarm Payrolls (NFP) report released last week. The weak job growth data, despite rising wage inflation, has raised expectations of a less hawkish Federal Reserve (Fed) stance. In the meantime, markets are pricing in a 25-basis-point rate (bps) cut by the Fed this week, which could further weaken the US Dollar.

Daily digest market movers: US Dollar down as US presidential election commences

• US Dollar faces selling pressure as attention shifts toward the US presidential election.
• ISM Services PMI for October exceeded expectations, indicating accelerating growth in the US service sector.
• The ISM Services PMI rose to 56 from 54.9 in September. This reading came in above the market expectation of 53.8.
• Prices Paid Index, a gauge of inflation, eased slightly, while the Employment Index improved.
• Concerns over political uncertainty rose among businesses, as per the ISM survey.
• Markets anticipate a 25 bps rate cut from the Fed next week and another in December.
• Investors speculate that a Trump victory could support the US Dollar due to his inflationary policies.
• There are no Fed speakers this week due to the media blackout ahead of the November 6-7 FOMC meeting.

DXY technical outlook:  Bearish momentum grows, support at 103.50

The DXY index is consolidating, possibly indicating a retest of the 200-day SMA support at 103.50. The Relative Strength Index (RSI) is sloping downwards, escaping overbought territory. The Moving Average Convergence Divergence (MACD) is indicating lower green bars, further hinting at a potential retracement. 

Key support levels to watch are 103.30 and 103.00, while resistance levels are found at 104.00, 104.50 and 105.00.

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

How often does the Fed hold monetary policy meetings?

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

What is Quantitative Easing (QE) and how does it impact USD?

In extreme situations, the Federal Reserve may resort to a policy named 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 during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

What is Quantitative Tightening (QT) and how does it impact the US Dollar?

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.

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