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- US Dollar stays firm, faces five G20 central bank announcements this Thursday
US Dollar stays firm, faces five G20 central bank announcements this Thursday
- The US Dollar trades firmly in the green after making new highs.
- Several central banks from G20 nations report this Thursday.
- The US Dollar Index prints a new six-month high but fades ahead of yearly high.
The US Dollar (USD) gained in strength as US Federal Reserve (Fed) Chairman Jerome Powell delivered what was expected: a hawkish pause. The devil was in the details in the US Dot Plot (Phillips curve), where the Fed remains above 5% for the better part of 2024. In the previous forecast, the Dot Plot showed rates between 4.5% and 5%. This surprise jacked up the 2-year US Treasury yield, which peaked at a 16-year high at 5.1973%. That news fuelled a rally in the Greenback.
Expect to see more volatility pick up this Thursday as a packed calendar for the US is not the only game in town. Five G20 central banks are set to issue rate decisions on Thursday. All eyes will be on Scandinavia, Switzerland, the United Kingdom and India as the most important ones. Expect to see some interesting moves across the markets, especially in the forex crosses where rate decisions will need to be digested and demand repricing.
Daily digest: US Dollar facing outside forces
- Swedish Riksbank hiked 25 basis points as expected to 4% and saw some Swedish Krona strength rippling through in USD/SEK and EUR/SEK.
- The Swiss National Bank (SNB) kept its policy unchanged at 1.75% against the odds of hiking to 2%. The Swiss Franc gets hammered against the USD (USD/CHF) and EUR (EUR/CHF).
- The Norwegian central bank, Norges Bank, hiked as expected from 4% to 4.25%. The Norwegian Krone strengthens in USD/NOK and EUR/NOK.
- The British central bank kept its benchmark rate unchanged at 5.25%, where an increase to 5.50% was expected. Even the surprise uptick in recent inflation numbers made the BoE split over wether to hike. The knife edge vote came out at 5-4, in favor of a pause in stead of a hike. The split decision together with the unchanged stance makes the Pound Sterling fall near 0.70% against the US Dollar (GBP/USD).
- At 12:30 GMT the US calendar kicks off with Jobless Claims. Both the Continuing and Initial are expected to only marginally grind higher. The Initial is set to head from 220,000 to 225,000. The Continuing Claims are expected to head from 1,688,000 to 1,695,000 from last week.
- At that same time the Philadelphia Fed Manufacturing Survey for September will come out, from 12 to -0.7.
- Around 14:00 GMT, Existing Home Sales arrive with the previous index at -2.2%. No forecast is available for this release.
- The US Treasury at 15:30 GMT will auction a 4-week bill at a substantially higher rate after the Fed decision overnight.
- Equities are in the red across the board in a flight to safety. It makes sense that equities are on the back foot as higher rates means less money flowing into equities with funding costs rising again on the back of the US Fed rate decision.
- The CME Group FedWatch Tool shows that markets are pricing in a 68.5% chance that the Federal Reserve will keep interest rates unchanged at its meeting in November. The last rate hike is expected for either December of January 2024.
- The benchmark 10-year US Treasury yield trades at 4.4192%, which is a 15-year high. The whole US yield curve got propped up higher after the US Dot Plot revealed Fed officials see rates higher for longer in 2024.
US Dollar Index technical analysis: Will it get there?
THe US Dollar breaks higher and prints another six-month high in the US Dollar Index (DXY). No yearly high just yet though, as 105.88 remains unthreatened for now. Expect with all the other central banks hiking this Thursday, that some headwinds could emerge for the Greenback with several currency crosses being repriced.
The US Dollar Index (DXY) has edged up, reaching 105.68. Should the DXY close above the yearly high, expect the US Dollar to follow on with more bullish moves in the medium turn.
On the downside, the 104.44 level seen on August 25 kept the Index supported on Monday, halting the DXY from selling off any further. Should the uptick that started on September 12 reverse and 104.44 give way, a substantial downturn could take place to 103.04, where the 200-day Simple Moving Average (SMA) comes into play for support.
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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