DXY: US dollar index unease as jobless claims and durable goods orders disappoint

DXY: US dollar index unease as jobless claims and durable goods orders disappoint
  • The US dollar index (DXY) was little changed as the market reacted to weak economic data from the US.
  • The initial jobless rose by more than 2.1 million, bringing the coronavirus toll to more than 40 million
  • The US economy contracted by 5.0% in the first quarter as consumer spending sunk

The U.S. dollar index (DXY) was little changed as investors reacted on the mixed economic data from the U.S

DXY
DXY rises slightly after initial jobless claims data

US initial jobless claims elevated

More than 2.12 million Americans filed for jobless claims in the previous week, according to the Labour Department. That was the lowest number of applicants in the past eight weeks. Analysts polled by Bloomberg and Reuters were expecting the claims to come in at 2.1 million and 2.4 million, respectively. The bureau also revised last week’s claims to more than 2.4 million.

The continuing jobless claims, which lags the initial claims declined to 21.05 million, down from last week’s 24.9 million. In total, more than 41 million Americans have filed for unemployment benefits since the coronavirus pandemic began.

These numbers have been elevated because many companies furloughed their employees as the shutdown started. Other companies went out of business since the number of bankruptcies is at the highest level since the 2008 financial crisis.

At the same time, the $2.2 trillion stimulus package passed by congress encouraged many employers to suspend their workers. That is because the package expanded the number of people eligible for the claims.

Analysts expect that the number of claims will continue to go down in the near term since many businesses are reopening. Some of the major companies that have reopened are Tesla, Disney, General Motors, and Boeing.

Other analysts do not expect the unemployment crisis to go away any time soon. This is because they expect the economy to take a longer period before it recovers. In a note, Goldman Sachs said:

“The U.S. unemployment crisis will not stand in the way of a near-term economic recovery but is also unlikely to go away quickly. Although the uncertainty is unusually large, we still see the U.S unemployment rate around 8% in late 2021.”

DXY reacts to weak GDP data

The U.S. dollar index also reacted to the weak Q1 GDP data released by the Bureau of Economic Analysis. The second reading showed that the U.S. economy contracted by 5.0% in the first quarter, slightly above the 4.8% released last month. That was the worst quarterly slowdown since the fourth quarter of 2008.

According to the bureau, the biggest drag to the economy was consumer spending, which represents about 67% of the economy. This spending declined by 6.8% in the quarter because many non-essential stores were closed in March. An increase in government spending partially offset the weakness in consumer spending.

The weakness in the first quarter was not unexpected since most people were staying at home. Also, the second quarter will be worse. Some estimates, including those from the Congressional Budget Office (CBO), expect the economy to contract by about 40% this quarter. The Federal Reserve expects the economy will weaken by more than 35%.

The DXY also reacted to the weak durable goods orders in April. According to the Census Bureau, the headline durable goods orders declined by 17.2 per cent in April after falling by 14.4% in March. In the same month, the core durable goods orders declined by 7.4% after falling by 0.2% in the previous month.

As with the Q1 contraction, analysts were expecting the durable goods orders to be weak because most companies like Boeing and United Technologies were not operating.

Looking forward, we expect the economic data to show some modest recovery in the next month. This is because most states have started to reopen their economies. Still, a second outbreak is the biggest risk.

U.S. dollar index analysis

US dollar index
US dollar index forecast

The US dollar index was unchanged after the mixed jobless claims, consumer spending, and durable goods order data. It is trading at 98.95, which is slightly above the important support of 98.78. It is also slightly above the 100-day and 50-day exponential moving averages and 50% retracement. The volatility, as measured by the Average True Range (ATR) has moved to the lowest level since March 9.

Therefore, this means that the index will break out in either direction. A move below 98.78 will mean that bears have prevailed and will see the index fall further.

By Crispus Nyaga
Crispus Nyaga is a finance analyst and trader with more than 7 years industry experience. He's contributed to some of the leading financial brands in the world including Seeking Alpha, MarketWatch, Forbes, and Investing.com. Crispus has an excellent understanding of global macroeconomic and geopolitical issues, is a big fan of golf, and lives in Nairobi with his wife, son, and nephew.
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