US Dollar Rises Despite ISM PMI Drop to 48.5

Quick Look:

Today, the US Dollar (USD) is making waves in the financial markets, showing strength despite disappointing economic data. Yesterday’s release of the Institute for Supply Management (ISM) manufacturing Purchasing Managers’ Index (PMI) figures for June presented a less than rosy picture. The PMI slipped to 48.5, down from May’s 48.7 and falling short of the anticipated 49.2. This decline indicates a contraction in the manufacturing sector, which has been struggling to gain momentum. Additionally, the price component of the PMI cooled significantly, dropping to 52.1 from 57, again missing the expected 55.8.

This trend of weaker US data is not isolated to the ISM figures. Over recent months, other key economic indicators such as the Consumer Price Index (CPI), durable goods orders, home sales, and the Personal Consumption Expenditures (PCE) index have all pointed towards a cooling US economy. Despite this slew of discouraging data, the DXY index, which measures the USD against a basket of major currencies, has climbed higher. Various factors, including market sentiment and broader economic dynamics, contribute to this resilience.

US Jobs Data on Friday

As the market digests the recent ISM figures, all eyes are now on Friday’s upcoming jobs report. The Federal Open Market Committee (FOMC) minutes, set to be released tomorrow, will also be closely watched, but the June jobs report holds the market’s full attention. This report is crucial as it could influence the Federal Reserve’s future monetary policy decisions.

If the jobs data reveals a weakening labour market, it could bolster expectations for a policy easing in September, potentially weighing on the USD in the short term. Currently, the CME Group’s pricing indicates less than a 60% probability of a rate cut in September. Conversely, a strong jobs report could diminish the likelihood of near-term easing, boosting the USD. This seesaw of expectations underscores the importance of Friday’s data in shaping market sentiment and currency movements.

US Elections Impact

In addition to economic data, the upcoming US elections significantly shapeg market dynamics. Recent polls suggest that former President Donald Trumpleadsg incumbent President Joe Biden. A recent Supreme Court ruling has further complicated this political backdrop by granting presidents immunity from prosecution for official acts. However, Trump could still face legal challenges related to unofficial acts connected to the 2022 election.

Generally, people view a potential Trump presidency as positive for the USD. This stems from expectations of lower regulatory controls, higher protectionism, growth-positive policies, and increased geopolitical uncertainty. These factors favour the USD, as they can lead to more robust economic performance and heightened demand for safe-haven assets like the USD. Traders are, therefore, keenly observing the political landscape, as shifts in the election outlook could have substantial implications for the currency markets.

Technical Views

The DXY index has been exhibiting a bullish trend from a technical perspective. The recent rally has pushed the index back above the 105.70 level, which is supported by the lower bounds of the bull channel. Momentum indicators have started to turn higher, suggesting that there is room for further gains as long as the bull channel remains intact. Traders are now eyeing the next significant resistance level at 107.04.

The technical setup indicates that the current upward momentum could continue, provided there are no significant reversals in market sentiment or unexpected economic shocks. This technical strength complements the broader narrative of USD resilience, even in the face of softer economic data and ongoing political uncertainty.