Service Sector Cooling Ignites Rate-Cut Expectations, Short-Term Downtrend Expected in USDX

Summary:

The current market is extremely sensitive to economic data, with the performance of second-tier and third-tier economic data sometimes overshadowing even speeches by Fed officials. With the impending release of the nonfarm payrolls report and a lack of intraday data guidance, it is anticipated that the heated expectations for rate cuts will persist until the release of the nonfarm payrolls report. At that point, the market will reprice the rate cuts based on the data. In other words, the downtrend in the US dollar index may continue until the release of the nonfarm payrolls report, although the decline may narrow.

SELL USDX

Close Time

CLOSED

104.400

Entry Price

103.742

104.900

97.920 -0.030 -0.03%

3.9

Pips

Profit

103.742

104.361

Exit Price

104.400

Entry Price

104.900

Fundamentals

The US dollar index fell sharply by 0.5% on Wednesday. Despite the ADP employment report showing an increase of 184,000 jobs, surpassing the expected 150,000 and the previous value of 140,000, the reaction of the US dollar index was muted after the data release. Instead, a less noticeable data point determined the movement of the US dollar index—the drop in ISM service sector prices, triggering a significant decline in the US dollar.

Although the ADP data exceeded expectations and the previous value, and sub-component data showed strong employment growth in all industries, the overall ADP data did not result in substantial changes and remained within the market's acceptable range. This may be partly due to the effect of recent speeches by officials, as many Fed officials have stated in speeches that the labor market has remained strong recently, a sentiment echoed by the data, thereby increasing market acceptance.

Moreover, the divergence between ADP and nonfarm payrolls has intensified since the second half of last year, which may be one of the factors.

The data that truly influences the trajectory of the US dollar is the ISM non-manufacturing (service sector) PMI. In this series of data:

The ISM non-manufacturing PMI was 51.4, marking the 15th consecutive month above 50, but the growth rate has been slowing for two consecutive months.

The ISM Non-Manufacturing New Orders Index was 55.4 (previously 56.1); the ISM non-manufacturing supplier Deliveries index was 45.4 (previously 48.9). These two data points indicate a slowdown in new order growth and faster supplier deliveries, the main reasons for the slowdown in the non-manufacturing PMI.

The ISM Non-Manufacturing Prices Index was 53.4 (previously 58.6), the lowest level in four years. This data is used to measure changes in the prices of materials and services purchased by businesses in the service sector, serving as an important indicator for evaluating inflation pressure and cost pressure.

The stubborn issue with inflation in the US lies in the service sector. The slowdown in this data undoubtedly signals a positive sign for inflation, indicating the potential for a sustained decrease in service sector inflation over the coming months.

It is precisely because of the decline in the ISM Non-Manufacturing Prices Index that the market's interpretation of the entire ISM non-manufacturing data tends towards "cooling in the service sector," boosting expectations of rate cuts and causing a sharp decline in the US dollar index.

This situation is similar to the impact brought by the ISM manufacturing PMI data released on Monday. At that time, the ISM manufacturing PMI acted as a "catalyst," igniting the effects of the Personal Consumption Expenditures (PCE) data released during the market holiday period on Friday as well as Fed Chairman Powell's speech, cooling expectations of rate cuts and leading to a sharp decline in the US dollar index. This time, the situation is the opposite.

Through the impact of this week's economic data on the US dollar index, it can be inferred that the current market is extremely sensitive to economic data, with the performance of second-tier and third-tier economic data sometimes overshadowing even speeches by Fed officials. With the impending release of the nonfarm payrolls report and a lack of intraday data guidance, it is anticipated that the heated expectations for rate cuts will persist until the release of the nonfarm payrolls report. At that point, the market will reprice the rate cuts based on the data. In other words, the downtrend in the US dollar index may continue until the release of the nonfarm payrolls report, although the decline may narrow.

Technical Analysis

Looking at the 4-hour chart, following yesterday's significant decline, the US dollar index appears to have temporarily lost hope of retesting 105.506. The short-term strong resistance is at the 32.8% Fibonacci retracement level of 104.397. Only a breakthrough above this level would allow the US dollar index to resume its upward trend, otherwise, there is a possibility of a deeper correction. The short-term strong support is at 103.742, which represents the top of the oscillation range in the historical trend. Breaking below this level may initiate a new downtrend in the short term.

In terms of indicators, in the Ichimoku Cloud, the baseline (Kijun-Sen) and the conversion line (Tenkan-Sen) are sharply declining, indicating a strong downtrend in the US dollar index. The current price is significantly distant from both lines, suggesting a potential short-term correction in the US dollar index. In the Directional Movement Index (DMI), a gap has formed after the crossover of the positive and negative directional indicators (±DI), with +DI below and positioned at 17.32, indicating a potential short-term uptrend in the US dollar index.

Overall, it may be prudent to consider entering short positions after a further rise in the US dollar index.

Service Sector Cooling Ignites Rate-Cut Expectations, Short-Term Downtrend Expected in USDX_1

Trading Recommendations

Trading Direction: Short

Entry Price: 104.40

Target Price: 103.742

Stop Loss: 104.90

Support: 104.163, 103.909, 103.718

Resistance: 104.397, 104.698

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