US Dollar tumbles ahead of GDP and PCE figures on Thursday
- US Dollar trades lower despite strong S&P PMIs
- The DXY Index took a downturn toward 103.05, below the 200-day SMA.
- US January S&P PMIs came in better than expected.
- All eyes are on Thursday’s PCE figures from December.
The US Dollar (USD), as expressed by the DXY Index, faced downward pressure falling towards 103.05. However, the USD’s losses may be capped by the report of strong economic activity figures, which may push investors to delay their rate cut expectations. Personal Consumption Expenditures (PCE) figures on Thursday will dictate the pace of the short term. In addition, growing tensions on the Red Sea might also benefit the Greenback in the next sessions.
The US economy is maintaining its robustness as traders await key data and central bank meetings later this week. Despite a lack of major data or any Fed speakers, the market pushed back its easing expectations to roughly 125 bps over 2024, down from nearly 175 bps earlier this month, which has helped the Greenback recover.
Daily Digest Market Movers: US Dollar loses traction as markets digest S&P PMIs
- The S&P Global Composite PMI released by S&P Global has posted 52.3 for January, surpassing the previous figure of 50.9.
- The Manufacturing PMI stood at 50.3 for January, reported by S&P Global, surpassing the previous and consensus figure of 47.9, indicating a solid growth in manufacturing activities.
- The Services PMI significantly beat the previous figure of 51.4 and consensus of 51 to settle at 52.9, highlighting a robust expansion in the services sector.
- For the Federal Reserve (Fed) these figures may present a threat to their battle against inflation, which could make them delay the start of the easing cycle.
- Projections from the CME FedWatch Tool show that the market's expectations for the start of the easing cycle have shifted to May as the odds of a cut in March now stands near 42%.
- Those odds may change after the US releases December’s Personal Consumption Expenditures (PCE) figures, the Fed’s preferred gauge of inflation, on Thursday.
Technical Analysis: DXY bulls struggle to hold ground as bears takes center stage
The indicators on the daily chart are reflecting moving dynamics. A downturn can be seen in the Relative Strength Index (RSI), Despite being in positive territory, the negative slope indicates that the buying momentum has been losing strength.
The Moving Average Convergence Divergence (MACD) also aligns with this outlook. The decreasing green bars on the MACD histogram highlight the weakening of bullish momentum.
Looking at the Simple Moving Averages (SMAs), the index is straddling a key transitional area. Its ability to remain above the 20-day SMA suggests that the buyers still dominate the short term. That being said, the index is below the 100 and 200-day SMAs, a clear indication that the longer-term trend still favors the bears.
Support Levels: 103.00, 102.80, 102.60 (20-day SMA).
Resistance Levels: 103.50 (200-day SMA),103.70, 103.90.
GDP FAQs
What is GDP and how is it recorded?
A country’s Gross Domestic Product (GDP) measures the rate of growth of its economy over a given period of time, usually a quarter. The most reliable figures are those that compare GDP to the previous quarter e.g Q2 of 2023 vs Q1 of 2023, or to the same period in the previous year, e.g Q2 of 2023 vs Q2 of 2022.
Annualized quarterly GDP figures extrapolate the growth rate of the quarter as if it were constant for the rest of the year. These can be misleading, however, if temporary shocks impact growth in one quarter but are unlikely to last all year – such as happened in the first quarter of 2020 at the outbreak of the covid pandemic, when growth plummeted.
How does GDP influence currencies?
A higher GDP result is generally positive for a nation’s currency as it reflects a growing economy, which is more likely to produce goods and services that can be exported, as well as attracting higher foreign investment. By the same token, when GDP falls it is usually negative for the currency.
When an economy grows people tend to spend more, which leads to inflation. The country’s central bank then has to put up interest rates to combat the inflation with the side effect of attracting more capital inflows from global investors, thus helping the local currency appreciate.
How does higher GDP impact the price of Gold?
When an economy grows and GDP is rising, people tend to spend more which leads to inflation. The country’s central bank then has to put up interest rates to combat the inflation. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold versus placing the money in a cash deposit account. Therefore, a higher GDP growth rate is usually a bearish factor for Gold price.