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- US Dollar on winning streak, while shift in monetary policy unfolds
US Dollar on winning streak, while shift in monetary policy unfolds
- The US Dollar keeps pressing after upbeat ISM data on Wednesday.
- Surprise rate cuts out of Poland make the ECB, BoE weaker against Fed.
- The US Dollar Index breaks above 105 but takes a small step back on Thursday.
The US Dollar (USD) has another go on Wednesday as markets tremble and crack in every pillar. The bond market sees its yields surge again, with the US 10-year yield on a trajectory to break the monthly high at 4.36%.
Equites took a short nosedive move on Wednesday with the S&P 500 breaking below the 55-day Simple Moving Average (SMA). With the surprise 0.75% rate cut from the Polish Central Bank, analysts are further increasing the rate divergence trade where US rates will remain elevated for longer and Europe, the United Kingdom and Central European countries will have to cut quicker and more aggressively in order to avoid a crashing economy.
While the macroeconomic data points from Wednesday were key and pivotal, there is nothing really important to expect this Thursday. Possibly the Initial and Continuing Jobless Claims might be worth watching in case there is a sudden uptick. Instead, gear up for the afternoon with no less than five US Federal Reserve speakers that might move the needle on making an end to this Indian Summer rally in the US Dollar Index.
Daily digest: US Dollar faces Fed speech
- Around 12:30 GMT, the data calendar for the US kicks off with the Weekly Initial and Continuing Jobless Claims. Expectations are for the Initial claims to jump from 228,000 to 234,000. The Continuing segment is expected to decline from 1,725,000 to 1,715,000.
- At that same time, the Nonfarm Productivity number for Q2 will be published. Expectations are for a small increase from 3.7% to 3.8%. The Unit Labor Costs are not expected to rise any further and should remain steady at 1.6%.
- A chunky batch of US Federal Reserve speakers: Patrick Harkers from Philadelphia is to kick off the headlines at 14:00 GMT. Next Fed member Austan Gooldsbee from Chicago will speak at 15:45 GMT. At 19:30 GMT, John Williams from New York will speak together with Raphael Bostic from Atlanta. Michelle Bowman will deliver the last remarks from Fed members this Thursday around 20:55 GMT.
- Equities in Asia are taking over the negative mood in which the US closed on Wednesday: The Hang Seng Index has fallen over 1% near its closing bell on Thursday. Meanwhile, European equities are firmly in the red but containing losses.
- The CME Group 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 4.29% and keeps heading higher after the US Treasury issued quite a lot of debt paper on Tuesday. The auctions flooded the markets with supply and saw yields ramping up.
US Dollar Index technical analysis: shifting reality
Taking a step back to the recent turn of events, it becomes clear that this week has already been a seismic shift from this year’s monetary policy for several big central banks. The clear shift in stance can be witnessed with the US Federal Reserve and the Bank Of Canada sticking to the higher for longer timeline concerning interest rates, while Poland and the European Central Bank are seeing EU data signaling distress. This only adds to more fuel in the rate divergence between the two big geographical blocks. Expect to see more gains in the US Dollar Index (DXY) in the fall once the ECB and other Central-European countries start to cut, while the Fed keeps rates steady throughout 2023.
All eyes stay on 105.00 after the DXY briefly broke the level on Wednesday. Only a few cents to go and the DXY will be at a new six-month high. The next levels are at 105.88, the high of March 2023, which would make a new yearly high. If the index reaches this last level, some resistance might kick in.
On the downside, the 104.30 figure is vital to keep the US Dollar Index sustained at these elevated levels. Some room lower, the 200-day Simple Moving Average (SMA) at 103.06 comes into play, which could bring substantially more weakness once the DXY starts trading 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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