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- US Dollar in calm mode as traders keep eyes on Jackson Hole
US Dollar in calm mode as traders keep eyes on Jackson Hole
- US Dollar price action expected to remain fairly muted with little waves during the week.
- Traders will try to keep their powder dry for the main event on Friday with US Fed Chair Powell's speech at Jackson Hole.
- The US Dollar Index holds on the gains and could eke out a three-month high if Powell speaks in favor of the Greenback.
The US Dollar (USD) hovers in the middle of a range where it can still reach new monthly or even three-month highs in some pairs. The current positioning is no coincidence as traders are facing one of the pivotal moments each year in the financial calendar. The annual Jackson Hole Symposium is due to take place on Friday where US Federal Reserve chairman Jerome Powell will give an important speech that could prove to be a game changer for the Greenback’s performance throughout the last quarter of 2023.
A very calm Monday thus gets underway as traders prepare for Jackson Hole and keep their powder dry in the meantime. On the economic data front ,one number that could make some small waves for the US Dollar is the Chicago Fed National Activity Index for July. Meanwhile, some attention leans toward China as markets reacted with disappointment to the small rate cut by the Peoples Bank of China (PBOC) overnight. The policy change has made equities slump at the start of the week.
Daily digest: US Dollar steady in holding pattern
- China has cut the five-year loan rate less than expected by 10 basis points to 3.45%, which is triggering a backslash in global markets for the Yuan and the Chinese stock market. At least 15 basis points were pencilled into expectations. Meanwhile mortage rates remain unchanged.
- Belarusian forces are conducting drills near the Polish border.
- Over the weekend China held military drills near the Taiwan Straight.
- At 12:30 GMT, the Chicago Fed National Activity Index for July will be printed. The previous number was a slight contraction at -0.32, but no expectations are available.
- The US Treasury will auction a 3-month and a 6-month bills at probably high rates based on the recent jump across the whole US yield curve.
- The BRICS convention is set to take place this week in South Africa with the conglomerate welcoming nearly 20 new members. Major theme will be the discussion on dedollarization and the setup of a payment system between the nations.
- China is being singled out in the stock market this Monday. The Hang Seng Index drops over 1.7% percent on the day, while Japan closes up 0.20%. European equities are shooting higher, while US futures are trading flat toward the Monday opening bell.
- The CME Group FedWatch Tool shows that markets are pricing in an 88.5% chance that the Federal Reserve will keep interest rates unchanged at its meeting in September.
- The benchmark 10-year US Treasury bond yield trades at 4.28% and is back up after its decline on Friday. The bond market in particular will be very sensitive to any news on Friday at the Jackson Hole Symposium. The whole US yield curve could move up or down depending on the speech from Fed chairman Jerome Powell.
US Dollar Index technical analysis: holding at 103
The US Dollar is hovering at the monthly high in the US Dollar Index (DXY). The Greenback retreats a touch this Monday as traders will try to keep their ammunition dry for the main event on Friday. Expect any sudden moves or breakdowns to be rather headline driven and short-lived for the most part this week.
On the upside, 104.00 is the level to reach. The high of Friday at 103.68 is vital and needs to get a daily close above it in order for the DXY to eke out more monthly gains. Should this US Dollar strength persist for the last part of this year, May’s peak at 104.70 could become the reality again.
On the downside, several floors are likely to prevent a steep decline in the DXY. The first one is the 200-day Simple Moving Average (SMA) at 103.20, which got broken very briefly on Thursday. Passing below the 103.00 figure, some room opens up for a further drop. However, around 102.34 both the 55-day and the 100-day SMAs await to catch any falling knives.
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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