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- US Dollar starts green as traders focus on US inflation this week
US Dollar starts green as traders focus on US inflation this week
- US Dollar up against most pairs with the Greenback in demand on Monday.
- Slow start of the week with some minor data points coming out.
- The US Dollar Index consolidates above 102 and flirts with more upside potential.
The US Dollar (USD) reboots its firm rally that started mid-July after hitting a curb on Friday with a mixed US jobs report. Market participants perceived the US jobs report as a sign that a pause is due for the Federal Reserve (Fed), pricing out a rate hike for the last quarter of 2023. As the dust settles, traders are back buying the Greenback as risk of sticky or higher US inflation could still be at hand.
On the economic front, eyes are on the Consumer Credit Change for June, which should not be that market moving. The main focus later this week will be on the US inflation numbers in the Consumer Price Index (CPI). They will act as a catalyst to define whether a Goldilocks scenario is in play with solid employment while price pressures drop or if sticky inflation remains stubborn. The first scenario will back a pause by the Fed, while the last one will lock in another rate hike for the next policy meeting.
Daily digest: US Dollar in favour of mixed picture
- New York Fed's John Williams comments that rates may come down next year. Meanwhile Morgan Stanley says markets should brace for disappointing US growth.
- The dust seems to settle this Monday as plenty of peaks from Friday after the US jobs report are being pared back partially. Investors are looking forward to the US inflation numbers later this week and are starting to pre-position for them.
- At 15:30 GMT the US Treasury is auctioning some debt on a 3-month and a 6-month tenure. With US bond yields on the rise this Monday, the auction could see some higher rates being demanded by investors.
- The European session will be closed already when the US Consumer Credit Change for June is due to come out at 19:00 GMT. Expectations are for a firm uptick in Consumer Credit from $7.2B to $13B.
- Equities across the globe, except for the Japanese Topix Index that closed positive up 0.40%, are taking a small hit this Monday. The demand for the US Dollar points to a little bit of risk aversion and could see the US Dollar jumping higher should US and European equities print deeper negative numbers.
- The CME Group FedWatch Tool shows that markets are pricing in an 84.5% chance that the Fed will pause hikes at its meeting in September. The probability of a pause peaked on Friday to 87.0% and is now abating a little bit.
- The benchmark 10-year US Treasury bond yield trades at 4.08% and is recovering from the slide on Friday where it hit 4.20% on the upside and got pulled back all the way to 4.03% in the wake of the US jobs report. A further recovery of the US Treasury note would go hand-in-hand with a stronger US Dollar.
US Dollar Index technical analysis: 102 a hard nut to crack
The US Dollar is back at the 102 digit after its recovery from mid-July hit a curb on the back of the US jobs report this past Friday. On a technical front, the US Dollar Index (DXY) is facing some difficult technical levels where traders will need to keep a close eye on the lower levels in order not to get caught on the wrong side of their trade. Key focal points will be Thursday and Friday with several US inflation indices being published.
For the upside, 102.32 is a key level to watch in the form of the 100-day Simple Moving Average (SMA). Even should the DXY be able to break and close above there, US Dollar bulls are not out of the woods yet, with the 55-day SMA just above there at 102.50. Two key levels need to be broken and closed above in order to avoid any large pullbacks before targeting 103 to the upside.
On the downside, the US Dollar bears will defend that same mentioned 100-day SMA at 102.32 and try to stage a firm rejection. The uptrend from mid-July will be broken once bears can pull the price action below 101.74, which is the low of this past Friday. Once that unfolds, the probability of the DXY collapsing all the way back to sub-100 is quite large.
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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