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- US Dollar steadies as traders enjoy Labor Day
US Dollar steadies as traders enjoy Labor Day
- US Dollar price action expected to head sideways at the start of the week.
- No real outliers or data points to monitor at the start of the week.
- The US Dollar Index is likely to hold above 104.00.
The US Dollar (USD) steadies on Monday, in a mixed bag against most major currencies. No real outliers to notice as US traders are enjoying the US Labor Day bank holiday. Expect low volumes this Monday as several futures markets are closed.
The focal point this week will be on Wednesday, when the Institute of Supply Management (ISM) will publish the key Services Purchasing Managers Index (PMI) survey for August. Additionally, nearly eight central bank speakers are due to make an appearance and might guide the market towards the next US Federal Reserve meeting on September 20.
Daily digest: US Dollar steadies while enjoying a break
- A very calm calendar ahead with US markets closed for the US Labor Day holiday.
- Germany July Machinery orders fell 11% on a yearly basis.
- Italy is set to prepare for raising its 2023 budget deficit targets, according to Reuters.
- Chinese president Xi Jinping will not attend the G-20 summit in India after reports that Chinese banks are distributing billions of loans to Russia.
- China issues more stimulus measures, which makes the property stocks gauge jump 2.8%.
- Markets will be on edge to hear if the biggest property developer of China, Country Garden, can afford its bond payments, which are already in an extended grace period. Non-payment would trigger a default.
- A similar picture to Friday unfolds in the equity markets with the Japanese Topix index closes at +1.02%. The Hong Kong Hang Seng is about to close higher after its emergency close on Friday due to a typhoon. The index caught up, jumping 2.50% near its closing bell. European equities are trading higher over 0.50% and US equity futures are mildly in the green.
- The CME Group’s FedWatch Tool shows that markets are pricing in a 93% 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 4.18% and will not move this Monday as bond markets are closed for US Labor Day.
- US Dollar Index technical analysis: left or right
- The US Dollar is steady, with no real outliers to report on this Monday. Volumes are usually lower on Mondays, and even more today with the US markets closed for US Labor Day. No big moves to takeaway for the US Dollar Index (DXY), which looks to be consolidating above 104.00.
In case pace picks up again on Tuesday in the same direction asFriday, a surge towards 104.00 is likely. In this region, 104.35 (the peak of August 29) is an ideal candidate for a double top. Should the Greenback go on a tear, expect a test at 104.47 – the six-month high. From there, 104.70 from May 31 will be the next target.
On the downside, the summer rally of the DXY will be the key element to track for any change in sentiment. That is the 200-day Simple Moving Average (SMA) at 103.06, which could bring substantially more weakness once the DXY starts trading further below it. The double belt of support at 102.42, with both the 100-day and the 55-day SMA, are the last lines of defence before the US Dollar sees substantial and longer-term depreciation.
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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