The US Dollar and Economy
As with all currencies the US Dollar and the US economy is deeply entwined. Traders not only wish to invest in a high interest and yielding currency but also a currency which is backed by a stable economy and political system.
The US economy is deemed to be the biggest and most stable hence why the US Dollar is the chosen reverse currency of central governing bodies and banks. Over the last 3 months we have seen a massive devaluation of the US Dollar mainly due to employment figures and the number of Coronavirus cases. In this blog we will look at the condition of the economy and price movement of the US Dollar.
The Latest Action
The US currency is weakening against its main competitors so far this week – the Euro, the Yen and the Pound.
American investors are focused on negotiations on new stimuli for the US economy and the continued escalation of tensions between the US and the PRC. The day before, the Democrats demanded to include in the project the American postal service funding, which the administration planned to cut.
GOP officials today said they are ready to approve additional $10 billion in postal funding if it comes in a package with initiatives such as extending federal unemployment benefits, funding a job protection program and allocating additional funds for coronavirus testing.
On Monday, the US imposed additional sanctions against the Chinese corporation Huawei, blacklisting 38 companies associated with it. Firms using US-based chip-making equipment are also required to obtain a US license before supplying certain chips to Huawei. Beijing has opposed new pressure measures, but no retaliatory sanctions have yet followed.
Tuesday’s data on the US construction market for July were positive, but failed to strengthen the dollar. The Building Permits report increased to 1.495M, and Housing Starts increased to 1.496M. Both indicators exceeded market expectations.
To get a greater understanding of the US Dollar, traders can look at the US Dollar Index which is the value of the US Dollar against six major currencies instead of a single pair. Wednesday is the first day in which the USD is showing bullish movement after depreciating for 5 consecutive days. Even with the slight increase on Wednesday the Dollar is trading at a low not witnessed since March 2018.
This Month’s Non Farm Payrolls
Most of the market agrees that the non-farm payrolls is the announcement which is likely to cause the most volatility throughout the month. NFP Friday has played an increased role over the last 2 months and can be deemed as more important than prior to COVID-19 as traders assess the level and speed of the employment sector.
The unemployment rate fell from 11.1% to 10.2% instead of 10.5% expected. Nonfarm Payrolls were lower than the June figure (4.791 million) but exceeded market expectations, amounting to 1.763 million. The reason for the increase in employment was the return to work of citizens who were previously laid off as a result of the introduction of quarantine measures. Most of the new employment is from catering establishments, bars, and restaurants.
In order for the US to see increasing confidence the NFP figures, over the next 2-3 months, will need to continue with the current trend, indicating that the employment sector is improving gradually.
Price Movement Analysis
As part of our price analysis, the section will concentrate on the EUR/USD as this is the most traded currency pair globally.
Looking at the price movement this week, we can see it stays strong, breaking through to a new price high after 2 earlier failed attempts. The stochastic oscillator signalled an overbought price and short term downward trend. However, the price has not since depreciated but instead solely loss momentum
The moving averages on the 4 hours, 1 hour and 30 min charts have all crossed upwards indicating possible uptrends, though the bullish movement has not yet materialized. The price is also trading above the 25 day exponential moving average also giving an indication of strong pricing.
There are 3 possible resistance points which traders can look at for possible breakout points: the First being at 1.19470, the second at 1.19530 and the third at 1.19650. However, traders should note that this Friday the Eurozone is releasing its inflation figures, which are deemed to have a high impact on the price of the EUR/USD. Therefore, on Friday it is also vital to concentrate on this release as well.
Overall, hopefully the blog managed to shed some light on the recent developments surrounding the US Dollar and what information you can concentrate on going forward, for example the use of the US Dollar index in order to trade the Dollar. Traders should also note that in order to get a sound understanding of the asset it is vital to evaluate both technical and fundamental aspects.