US Dollar Strengthens During European Session on Friday.
Introduction
In Friday’s European session, the US dollar continued to display its strength, maintaining its weekly gains. The US Dollar Index (DXY) surged above 101.00, reaching a new 9-day high. Despite a subdued Asian session, the USD found significant interest during the European trading hours, leading to its upward trajectory.
Subdued Asian Session Sparks Interest in the US Dollar
During the early hours of Friday’s trading, the USD witnessed capital outflows from the Japanese Yen, which significantly contributed to the DXY’s ascent. Reports from Reuters indicated that the Bank of Japan was likely to maintain its yield curve control (YCC) strategy during the upcoming policy meeting, based on insights from five individuals familiar with the matter. This negative outlook on the Japanese economy caused the JPY to decline and ultimately boosted the USD’s performance.
Limited Impact of US Economic Data Releases
As the week approaches its end, there were no notable data releases scheduled on the US economic calendar that could substantially affect the USD’s performance against its competitors. With investors anticipating the Federal Reserve policy meeting set for the following week, many may choose to adopt a cautious approach and refrain from taking up significant positions.
Factors Supporting the US Dollar’s Weekly Gains
The US Dollar Index received a boost when the US Department of Labor reported a decline in new applications for unemployment benefits to 228,000 in the week ending July 15. This figure was significantly lower than the market’s expectation of 242,000, further contributing to the USD’s strength. Additionally, Existing Home Sales experienced a slight decrease of 3.3% in June after a 0.2% increase in May.
Market Indices and Geopolitical Events Influence the Dollar
Market indices also played a role in the USD’s performance. The Dow Jones Industrial Average closed in positive territory on Thursday, while the Nasdaq Composite experienced a decline of more than 2%.
In the geopolitical landscape, The Wall Street Journal reported on Thursday that the United States had taken measures to prohibit 14 Iraqi banks from conducting business using the USD due to suspicions of money transfers to Iran.
China’s Response to Potential Restrictions
Statements from China’s ambassador to Washington, Xie Feng, echoed across the global market. He asserted that China would respond if the US imposed additional restrictions on the country’s semiconductor sector. These remarks, made on Wednesday, added an element of uncertainty to the economic landscape.
Federal Reserve and Economic Indicators
Amidst these events, the Manufacturing Index of the Federal Reserve Bank of Philadelphia saw a minor increase from -13.7 in June to -13.5 in July. Additionally, the GDP Now model from the Federal Reserve Bank of Atlanta projected the second quarter US GDP growth to be 2.4%.
Data from the US Census Bureau revealed a decline in housing starts by 8% on a monthly basis in June, following a 15.7% increase in May. Building Permits also decreased by 3.7%, reversing May’s growth of 5.6%.
Retail Sales and Industrial Production Figures
Retail sales in the US showed a modest increase of 0.2% in June, reaching $689.5 billion, falling short of the expected 0.5% rise. Excluding automobile sales, the growth stood at 0.2%, slightly below the market expectation of 0.3%.
Industrial production in the US faced challenges, declining by 0.5% for the second consecutive month in June, as reported by the US Federal Reserve.
Outbound Investment Limitations in China
US Treasury Secretary Janet Yellen expressed the possibility of the Biden administration implementing outbound investment limitations on China. The statement, made to Bloomberg on Monday, added to the ongoing US-China economic tensions.
Technical Analysis: US Dollar Index’s Recovery Prospects
Analyzing the technical aspects, the Relative Strength Index (RSI) signal on the daily chart crossed over 40, indicating the US Dollar Index (DXY) has further upside potential before neutralizing. Crucially, 101.00, the previous support and a static level align as a pivotal DXY pivot point.
A sustained rebound towards 101.50 (a static level), 101.80 (20-day Simple Moving Average), and 102.00 (a psychological milestone) may be possible, depending on the DXY’s weekly close above that level.
Key Support Levels for the US Dollar Index
On the downside, temporary support is seen at 100.50 (a static level), before reaching the psychological level of 100.00. If the DXY index continuously closes below the latter, the next level of support at 99.20 (a static level from March 2022) could come into consideration.
Conclusion
The US dollar showcased strength during the European session on Friday, maintaining its weekly gains. Factors such as economic indicators, geopolitical events, and market indices influenced the USD’s performance. As the week came to a close, investors looked ahead to the Federal Reserve policy meeting scheduled for the following week. The technical analysis suggests that the US Dollar Index is poised for a potential recovery, although support levels should be closely monitored.