DXY rips higher as ISM Services gauge rises to 56.9

The dollar index (DXY) continues its march higher after the ISM Services release. In August, the US services sector continued to expand, as reflected by the better-than-expected data.

With the US economy giving no signs of cooling off, the Fed has no reason not to continue its policy tightening process. As such, the ongoing US dollar strength is not random; more of the same lies ahead.

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ISM Services PMI shows consistently strong growth in the services sector

Any print above 50 shows a sector that keeps growing. Today’s print of 56.9 is particularly good for at least two reasons.

First, 56.9 is well above 50, meaning that growth is not random but solid. Second, the US economy is service-based, and so the services sector weighs more in the country’s GDP than the manufacturing one.

Out of all of the components tracked by the report, three came out above 60 – Business Activity, New Orders, and New Export Orders.

Another good news is that the inventories are declining while employment started to grow again in August. Everything points to ongoing economic strength, so there is no reason for the US dollar’s strength to end anytime soon.

Dollar index rises above 110

DXY bottomed at the start of 2021. It formed a double bottom pattern in the first five months of 2021, followed by a bullish run.

Any bullish trend is made of a series of higher highs and lower lows. As long as the series persists, the trend remains intact.

Today’s move above 110 is part of the said bullish run, and only a drop below the pivotal 104 shows a possible reversal.  

No reason for the Fed to stop the tightening cycle

So why is the dollar stronger?

Much of the talk over the summer months was about how the Fed will stop tightening as the economic growth slows. But there is no sign of economic weakness – just the opposite.

Therefore, today’s news complements a solid jobs report released last Friday. In other words, DXY’s bull run should continue as the Fed has no reason to stop the tightening cycle.