• US Dollar weakens against its major rivals on Thursday.
• US Dollar Index stays deep in negative territory below 104.00.
• US Department of Labor announced that there were 261,00 Initial Jobless Claims last week.

The US Dollar (USD) stays on the back foot in the second half of the week and continues to lose value against its main competitors. The US Dollar Index, which gauges the USD’s valuation against a basket of six major currencies, stays deep in negative territory below 104.00.

In the week ending June 3, there were 261,000 initial claims for unemployment benefits in the United States (US), an increase of 28,000 from the previous week’s 233,000, the US Department of Labor reported on Thursday. This reading surpassed the market expectation of 235,000 by a wide margin and caused the USD to come under renewed selling pressure in the early American session.

Daily digest market movers: US Dollar comes under pressure on Thursday

• The CME Group FedWatch Tool shows that markets are currently pricing in a 73% probability of the Fed leaving its policy rate unchanged after the June policy meeting. 
• Following Wednesday’s sharp upsurge, the benchmark 10-year US Treasury bond yield reversed its direction and was last seen losing more than 1% on the day below 3.75%. 
• 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. After the opening bell on Thursday, the S&P 500 trades flat on the day.
• 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 drops below key technical level

The US Dollar Index (DXY) seems to have lost bullish momentum with the Relative Strength Index (RSI) indicator on the daily chart retreating toward 50. DXY was last seen trading slightly below the 20-day Simple Moving Average, currently located at 103.70.  

In case the index manages to reclaim 103.70, it could face 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, 103.00 (100-day SMA) could be seen as the next bearish target before 102.70 (static level).

How is US Dollar correlated with US stock markets?

Stock markets in the US are likely to turn bearish if the Federal Reserve goes into a tightening cycle to battle rising inflation. Higher interest rates will ramp up the cost of borrowing and weigh on business investment. In that scenario, investors are likely to refrain from taking on high-risk, high-return positions. As a result of risk aversion and tight monetary policy, the US Dollar Index (DXY) should rise while the broad S&P 500 Index declines, revealing an inverse correlation. 

During times of monetary loosening via lower interest rates and quantitative easing to ramp up economic activity, investors are likely to bet on assets that are expected to deliver higher returns, such as shares of technology companies. The Nasdaq Composite is a technology-heavy index and it is expected to outperform other major equity indexes in such a period. On the other hand, the US Dollar Index should turn bearish due to the rising money supply and the weakening safe-haven demand.