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Dollar Traders Regroup Ahead Of FOMC

Jan 29 2020, 08:22 PM (BDT) |

Better Data Boost Dollar

The US dollar has been helped higher once again this week, ahead of the FOMC later today. Yesterday, the conference board consumer confidence index printed a robust 131.6 reading against the prior and expected figure of 128.2. This latest reading, which is the best since August 2019, is not too far off the cycle higher of 137.9 (October 2018). This has seen the USD index well bid over the last 2 sessions.

The breakdown of the data shows the reading was driven by solid gains in both the present situation component as well as the expectations component. The Conference Board said that the gain was:

“driven primarily by a more positive assessment of the current job market and increased optimism about future job prospects”.

Labour Market Driving Confidence Gains

The explanation from the Conference Board once again puts emphasis on the strength in the US labor market. Unemployment is currently sitting at its lowest levels since the 1960s. This, combined with record highs in both home and equity prices and much-lower gasoline prices, is creating an encouraging environment for consumers.

Wage Growth Receding

Despite the strength in the labor market, however, one area where strength is not being seen is wage growth. The latest reading showed wage growth fell back to 2.9% year on year. This is despite having nearly been as high as 4% last year. The takeaway here is that, if the US economy is going to see the type of increase in consumer spending which is typical for this level of consumer confidence, households will have to start mobilizing their savings, as wages are not growing.

Corona-Virus Impact Not Accounted For

It is also worth noting that the cut off period for this latest CB consumer confidence reading was January 15th. This means that the survey period does not account for the period covering the corona-virus outbreak. In terms of impact so far, we have seen equities moving lower as risk sentiment weakens.

However, this correction could deepen as the outbreak spreads and could present a major headwind to the US economy in the early part of this year. It will certainly be interesting to see how the Fed addresses the outbreak at the FOMC later today given that it is presenting an opposing force to the positive pressure from the signing of the US/China trade deal.

Technical Perspective

The US dollar index has now broken out above both the 97.42 resistance level and the bearish channel top. While above here, the focus is on a further push higher to the 98.25 level next. This is a key resistance level for the USD and is the last main level ahead of the 2019 highs around 99.33. To the downside, any break lower will likely find support into the 97.42 level with a heavy reversal needed to put any focus back on the 96.37 level.

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