Strength in US Dollar Index (DXY) Proves Unsustainable

The US Dollar Index (DXY), which measures the greenback’s strength against a basket of six major currencies, has given back the gain recorded during Thursday’s session and is currently trading within reach of the recent lows, holding near 97.35, a loss of 0.54% from Thursday’s close.

The buck benefited on Thursday from a batch of strong economic data. Initial jobless claims declined 4,000 to 232,000 in the week ending May 13th from 236,000 previously. Consensus forecasts called for a small increase to about 240,000 for the week. The four-week moving average declined to 240,750 from 243,000 previously. Continuing claims for the week ending May 6th declined by 22,000 to 1.898 million, which is the lowest level since November 5, 1988. Given that this report covered the period in which the employment survey was conducted for the May employment report, it will generate expectations for another month of strong nonfarm payroll growth in the US.

The Philadelphia Fed Index was also reported on Thursday, coming in at 38.3 for May, versus consensus at 18.5, and a reading at 22.0 in April. The dividing line between growth and contraction for this regional manufacturing survey is 0.0. The May reading is the second-highest reading for the Index since January 1984. The report indicates that firms continue to expect growth.

Finally, it was reported that the Conference Board’s Leading Economic Index increased 0.3% in April, versus consensus at +0.4% and following a downwardly revised 0.3% increase (from 0.4%) in March. April marked the eighth straight increase for the leading index. The report indicates that strengths among the leading indicators have remained widespread.

The data boosted the probabilities of a rate hike by the FOMC at the June meeting. At Thursday’s close, Fed funds futures were pricing in a 73.8% probability of a rate hike, up from 64.6% the session prior.

DXY rose to a session high at 98.07 by mid-afternoon yesterday, but formed a shooting star, a bearish candlestick signal, on the 30-minute chart, and has remained under pressure since. Within reach as a result of today’s decline is first support at the current sell-off low established Wednesday at 97.33. A break below this level is expected, leaving the next support to watch at the November 4th low at 96.89, followed by the spike low established at the time of the US Presidential election, which stands at 95.89.

The dollar index has come under pressure due to several factors this week. Housing Starts/Building Permits, both reported on Tuesday, came weaker than expected for April. In addition, political turmoil in the US has been a drag on the dollar.

On Wednesday, it was reported that US President Trump asked former FBI Director James Comey to end the investigation of former National Security Advisor Michael Flynn. This news sparked concerns over obstruction of justice charges against the President, an impeachable offense. This development was the impetus behind Wednesday’s US equity market rout, during which the major price indexes experienced their worst day of losses so far this year.

Then on Thursday, Reuters reported new developments regarding the investigation into Russia’s alleged interference with the 2016 US Presidential election. According to Reuters, the Trump campaign had at least 18 undisclosed contracts with Russians. Specifically, Michael Flynn and other advisers to Donald Trump’s campaign were in contact with Russian officials and others with Kremlin ties in at least 18 calls and emails during the last seven months of the 2016 presidential race. A special counsel has been appointed to investigate Russia’s involvement with the election.

There is concern is that the controversies will derail efforts by President Trump to implement his economic stimulus plans. Hopes pegged on Trump’s economic stimulus plan were the impetus behind DXY’s advance from the time of the November election to the early 2017 peak set at 103.82, a move which lifted DXY more than 7%. The majority of that advance has now been given back.

The economic calendar in the US today is void of releases. However, the FOMC’s Bullard is scheduled to speak at 09:15 ET. Bullard, the President of the Federal Reserve Bank of St. Louis, is a non-voting member of the FOMC. However, he will speak on the US economy and monetary policy and could give clues as to the Fed’s next move. Federal Reserve Bank of San Francisco President Williams will speak in the afternoon. He also is a non-voting member of the FOMC.

At 13:50 ET today, the weekly Commitment of Traders report from the Commodity Futures Trading Commission, will be released. The last report, with data as of the May 9th close, showed that large speculators reduced net long positioning in US dollar index futures to 35,749 contracts from 40,020 contracts. This net long positioning in US dollar index futures by large speculators is the lowest since early October 2016.

Next week, Monday’s US calendar also contains no high impact releases. While the Chicago Fed National Activity Index for April is due at 08:30 ET on Monday, this is a low impact report. On Tuesday, however, the high impact New Homes Sales release for April is due at 10:00 ET.

US Dollar Index (DXY) Daily Chart

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Tracy L. Morganthall, CMT, has been a Technical Market Analyst for more than 20 years. She has experience analyzing and producing reports on equities, both domestic and international markets, as well as Forex and commodities. She attended Trenton State College in Trenton, New Jersey, earning a Bachelor's in Finance.