US Dollar Outlook: DXY Aims Higher On Robust Data, Taper Risk

Dollar, Money, Cash Money, Business, Currency, Finances

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US Dollar bulls are flexing their muscles on Thursday and steering the Greenback sharply higher. The broader DXY Index is up around 0.6% intraday to trade at its strongest level in three weeks. This influx of US Dollar buying pressure looks both fundamentally and technically driven. On the fundamental side, traders are likely still digesting news out of the Federal Reserve released after-hours yesterday.

The Fed announced that it will unwind its corporate credit lending facility by year-end. Seeing that this facility was closed on 31 Dec 2020 and only holds $13.7-billion worth of assets, some pundits have dismissed the headline. I would argue, however, that the messaging behind the move and its impact on market sentiment is more profound than what simply meets the eye.

Some FOMC officials have professed that it ‘is not the time to start talking about tapering yet,’ but surely there must have been a conversation internally at the Federal Reserve to make this decision. More importantly, the fact of the matter is the Fed is now officially planning to sell (i.e. taper) some assets that were accumulated during the covid crisis. This likely stands to intensify the Fed taper debate amongst market participants and fuel US Dollar strength in turn as traders price in the threat of Fed tapering.

DXY – US DOLLAR INDEX PRICE CHART: WEEKLY TIME FRAME (09 DEC 2019 TO 03 JUN 2021)

DXY Index Price Chart US Dollar Forecast

Chart by @RichDvorakFX created using TradingView

Not to mention, the latest ISM Services PMI report was just released this morning and topped consensus forecast. Headline ISM Services PMI data crossed the wires at 64.0, which was above estimates of 63.2 and topped the prior reading of 62.7 for April. This followed robust jobs data released earlier in the morning with ADP employment showing an increase of 978K and initial jobless claims dropping to 385K.

These upbeat employment figures could serve as a precursor to tomorrow’s high-impact release of nonfarm payrolls (NFPs) due at 12:30 GMT. More evidence of the labor market recovering revealed in tomorrow’s NFP report might help drive the US Dollar higher with Treasury bond yields. Conversely, a disappointing NFP report likely stands to keep Fed taper hawks at bay and might see US Dollar bears fade the recent influx of strength.

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