US Dollar marginally weaker ahead of US jobless claims data

• US Dollar weakens modestly against its major rivals on Thursday.
• US Dollar Index fluctuates below 104.00 but stays in weekly range.
• US Department of Labor will release the weekly Initial Jobless Claims data.

The US Dollar (USD) stays on the back foot in the second half of the week but the currency's losses against its peers remain limited. The US Dollar Index, which gauges the USD's valuation against a basket of six major currencies, fluctuates in negative territory below 104.00, while remaining in the weekly range.

The US Department of Labor will release the weekly Initial Jobless Claims data on Thursday, which could have a short-lasting impact on the USD's performance. Ahead of the May inflation report and the Federal Reserve's policy announcements next week, however, the USD's action could remain subdued.

Daily digest market movers: US Dollar struggles to preserve its strength

• The CME Group FedWatch Tool shows that markets are currently pricing in a nearly 70% probability of the Fed leaving its policy rate unchanged after the June policy meeting. 
• The Bank of Canada unexpectedly raised its policy rate by 25 basis points to 4.75% on Wednesday due to increasing concerns over the Consumer Price Index (CPI) inflation getting stuck materially above the 2% target. The benchmark 10-year US Treasury bond yield climbed above 3.8% following this development.
• The risk-sensitive Nasdaq Composite fell more than 1% but the financial-heavy Dow Jones Industrial Average closed modestly higher on Wednesday. Early Thursday, US stock index futures trade mixed.
• In its latest outlook published on Wednesday, the OECD said that it sees the Fed funds rate peaking at 5.25%-5.5% from Q2 2023, followed by two "modest" cuts in the second half of 2024.
• The United States the goods and services deficit stood at $74.6 billion in April, the US Census Bureau reported on Wednesday. Exports declined $9.2 billion to $249 billion, while imports rose $4.8 billion to $323.6 billion.
• The monthly data published by the ISM showed on Monday that the business activity in the US service sector continued to expand in May, albeit at a softer pace than it did in April. The ISM Services PMI declined to 50.3 in May from 51.9 in April and missed the market expectation of 51.5.  
• Further details of the ISM PMI report revealed that the Prices Paid Index edged lower to 56.2 from 59.6 and the Employment Index dropped to 49.2 from 50.8.
• Commenting on the data, "there has been a pullback in the rate of growth for the services sector," noted Anthony Nieves, Chair of the Institute for Supply Management (ISM) Services Business Survey Committee. "This is due mostly to the decrease in employment and continued improvements in delivery times (resulting in a decrease in the Supplier Deliveries Index) and capacity, which are in many ways a product of sluggish demand."
• The US Census Bureau announced on Monday that Factory Orders rose 0.4% in April following the 0.9% increase recorded in March.  

Technical analysis: US Dollar Index loses bullish momentum

The US Dollar Index (DXY) seems to have lost bullish momentum with the Relative Strength Index (RSI) indicator on the daily chart retreating below 60. DXY, however, continues to trade above the 20-day Simple Moving Average, currently located at 103.70.  

The index faces immediate resistance at 104.00 (Fibonacci 23.6% retracement of the November-February downtrend) ahead of 104.50 (static level) and 105.00 (psychological level). 

On the downside, bearish pressure could increase if DXY closes the day below 103.70. In that scenario, 103.50 (static level) aligns as interim support before 103.00 (100-day SMA).

How does Fed’s policy impact US Dollar?

The US Federal Reserve (Fed) has two mandates: maximum employment and price stability. The Fed uses interest rates as the primary tool to reach its goals but has to find the right balance. If the Fed is concerned about inflation, it tightens its policy by raising the interest rate to increase the cost of borrowing and encourage saving. In that scenario, the US Dollar (USD) is likely to gain value due to decreasing money supply. On the other hand, the Fed could decide to loosen its policy via rate cuts if it’s concerned about a rising unemployment rate due to a slowdown in economic activity. Lower interest rates are likely to lead to a growth in investment and allow companies to hire more people. In that case, the USD is expected to lose value.

The Fed also uses quantitative tightening (QT) or quantitative easing (QE) to adjust the size of its balance sheet and steer the economy in the desired direction. QE refers to the Fed buying assets, such as government bonds, in the open market to spur growth and QT is exactly the opposite. QE is widely seen as a USD-negative central bank policy action and vice versa.