Philly Fed continues to fall; US Dollar doesn’t seem concerned

The Philadelphia Fed Manufacturing Index for November fell to -19.4 vs an expectation of -6.2 and a prior reading of -8.7.  This is the lowest level the index has fallen to since May 2020. The main culprit for the large drop was the employment component, which fell to 7.1 vs an expectation of 29 and an October reading of 28.5!  The average workweek index also fell to 1.4 from 10.4 in October.  The Philly Fed report is in stark contrast to the NY Empire State Manufacturing Index reported earlier in the week.  The NY Fed index rose to 4.5 vs an expectation of -5 and a prior reading of -9.1.  Interestingly, one of the main drivers of the increase in the headline number was an increase in employment and a longer average workweek.  One thing the two indexes have in common is that they both see slower business activity 6 months from now. The Philadelphia market encompasses a greater amount of manufacturing businesses, so it tends to be the most widely followed of all the regional Fed manufacturing indexes.

However, the poor Philly Fed Manufacturing did little for doves who are hoping for lower interest rates.  The data, on its own, fell to the wayside as traders focused on the stronger data from earlier in the week and Fed speakers.  Strong retail sales, plus a bullish St Louis Fed President Bullard, gave hope for US Dollar bulls that the Fed would continue to raise rates.  The US Dollar Index rose to an intra-day high of 107.24.  After such a strong selloff over the last few weeks, its not surprising to see the DXY consolidate near support (the 50% retracement level from the lows of March 31^st to the highs of September 28^th).  US Dollar bulls will be looking for a bounce from current levels, while bears will be looking to sell at resistance levels.

Source: Tradingview, Stone X

In contrast, the Euro makes up 57% of the DXY. Therefore, EUR/USD typically moves in the opposite direction of the US Dollar Index.  Notice that the pair has been bouncing aggressively as the DXY sold off.   EUR/USD held the 50% retracement resistance level from the highs of February 10^th to the lows of September 28^th.  If the DXY continues higher, EUR/USD should move lower.  The first support is at the highs of October 27^th at 1.0094.  Below there, price can fall to the lows of November 10^th at 0.9936, then the top downward sloping trendline of the channel the pair had broken above on October 25^th, near 0.9775.  However, if EUR/USD continues to move higher, the next resistance above the 50% retracement is horizontal resistance at 1.0627, then the 61.8% Fibonacci retracement level from the previous mentioned timeframe at 1.0747.

Source: Tradingview, Stone X

The US Philly Fed Manufacturing Index fell to its lowest level since May 2020.  The print would suggest that the Fed may wish to slow the pace of raising rates. Therefore, one would expect to see the US Dollar Index pull back.  However, traders seem to be focusing more on strong Retail Sales from earlier in the week and St Louis Fed President Bullard’s hawkish comments, sending the DXY higher and the EUR/USD lower.  US Dollar bears may be looking for higher levels to sell, while EUR/USD bulls may be looking for better levels to buy.  Watch for more Fed speakers later today and tomorrow to get a better idea of where the US Dollar may be headed!