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- US Dollar in the green as Greenback advances on all fronts
US Dollar in the green as Greenback advances on all fronts
- The US Dollar pops higher, partly erasing Tuesday’s losses.
- US Factory Orders and FOMC Minutes are on focus this Wednesday.
- The US Dollar Index is back above 103.00, though markets bear nervous reactions.
The US Dollar (USD) is back from a short hiatus on Tuesday due to the US national holiday. Markets focus back on the two main key elements for this week, which are the US Jobs report on Friday and the Federal Open Market Committee (FOMC) Minutes that are set to be published at 18:00 GMT. Trades will look for clues on the number of interest-rate hikes expected, and foremost, the longevity of the pivot level the Fed will want to maintain before starting to cut rates. Any prospect of rate cuts will result in a weaker US Dollar as the interest rate value for the currency will start to decrease against its peers, likely prompting gains for US equities instead.
Other data points for this Wednesday to look for are Factory Orders and the IBD/TIPP Economic Optimism Index, both due at 14:00 GMT. . The US Energy Information Administration (EIA) numbers for the Crude Oil reserves of the US have been pushed forward to Thursday. The key FOMC minutes will be published at 18:00 GMT, and traders will see the oil reserve data from the American Petroleum Institute (API) at 20:30 GMT.
Daily digest: US Dollar has its work cut out to erase Tuesday’s losses
- US Factory Orders, set to come out at 14:00 GMT, are expected to jump from 0.4% previous to 0.8% in May.
- John C. Williams, the president of Federal Reserve Bank of New York, is set to make an appearance around 20:00 GMT and could deliver additional comments to guide the markets around the FOMC Minutes statement.
- The US Dollar is stuck in choppy trading against the Euro as Purchasing Manager Index numbers fell below 50 for France and Italy. Both Europe and the US are thus seeing contractions in their PMIs. At the same time, the European Central Bank (ECB) published a survey of inflation expectations, which have been revised to the downside. This adds to evidence of subsiding inflation pressures, making it more likely that the ECB will end its hiking cycle sooner than markets anticipate.
- China’s June Caixin Services and Composite Purchase Manager Index (PMI) declined compared with the previous month, triggering a sell-off in Chinese equities and a weaker Yuan.
- Asian markets were mostly in the red, with the Japanese Topix closing nearly unchanged and the Chinese Hang Seng losing 1.57%. European indices are on the descent as well, though no major index is losing more than 1%. US equity futures are mildly in the green and will possibly stay rather muted until investors hear more from the FOMC Minutes.
- The CME Group FedWatch Tool shows that markets are pricing in a 88.2% chance of a 25 basis points (bps) interest-rate hike on July 26. The dislocation between market expectations and what the Fed has been communicating in terms of number of rate hikes is still persistent and could trigger a stronger US Dollar once markets get to the point of realisation. The FOMC Minutes could trigger a rise in possibility of a second hike in some later-dated futures.
- The benchmark 10-year US Treasury bond yield halted trading at 3.84% on Wednesday after being closed throughout Tuesday. No clear sense of direction to take away around halfway through the European session.
US Dollar Index technical analysis: USD hard to let go of 103.00
The US Dollar is painting a whole other picture compared to its performance on Tuesday, when it weakened against most major currencies. On Wednesday, nearly every segment is in the green with Canadian Dollar (USD/CAD) and Indian Rupee (USD/INR) both at a month-high level. The US Dollar Index is back to where it was on Monday, around 103.00, and further direction will depend on the perception of the markets over the FOMC Minutes.
On the upside, look for 103.54 as the next key resistance level, which falls in line with the last week’s high. The 200-day Simple Moving Average (SMA) at 104.83 is still quite far away. So the intermediary level to look for is the psychological level at 104.00 and May 31 peak at 104.70.
On the downside, the 55-day SMA near 102.76 has proven its importance as it clearly underpinned price action on Friday and Monday by triggering a turnaround after the firm weakening of the Greenback. A touch lower, 102.50 will be vital to hold from a psychological point of view. In case the DXY slips below 102.50, more weakness is expected with a full slide to 102.00 and a retest of June’s low at 101.92.
US Dollar FAQs
What is the US Dollar?
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022.
Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
How do the decisions of the Federal Reserve impact the US Dollar?
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
What is Quantitative Easing and how does it influence the US Dollar?
In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system.
It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
What is Quantitative Tightening and how does it influence the US Dollar?
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
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