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- US Dollar relentless with US Dollar Index back at the highs
US Dollar relentless with US Dollar Index back at the highs
- Traders quickly lose the risk-on sentiment from early Monday with US government shutdown avoided over the weekend.
- Focal point this week will be right at the end with US Nonfarm Payrolls on Friday.
- US Dollar Index’s 11th consecutive weekly gain followed by Monday continuing its trend.
The US Dollar (USD) did not get much time to enjoy the party over its eleventh straight week of gains. Last week was a close call as the US Dollar Index (DXY) was able to lock in its gains only in the last few trading hours. Although the US government shutdown might be solved for now, with the US Congress pushing the budget showdown to November, the can has merely been kicked down the road for roughly six weeks.
On the data front, the current stance of the US Federal Reserve got confirmed yet again with the Personal Consumption Expenditures (PCE) index. Although headline PCE saw energy adding to inflation, the Core numbers pointed to further abating inflation. The question for this Monday will be how the Purchasing Managers Indices (PMI) will behave, as a further decline into contraction might start to hurt.
Daily digest: US Dollar faces chunky week
- A packed economic calendar starts the week off with the S&P Global Manufacturing Purchase Managers Index for September at 13:45 GMT. The number should remain steady, though still in contraction, near 48.9.
- At 14:00 GMT the Institute of Supply Management (ISM) is due to print its monthly numbers for September: Employment is expected to drop from 48.5 to 48.3. New Orders hit 46.8, though no forecast is available this time. The Purchasing Managers Index (PMI) is expected to stay in contraction from 47.6 to 47.7. The Prices Paid element is expected to tick up a bit from 48.4 to 48.6.
- Markets are expecting to hear from Federal Reserve Chairman Jerome Powell and Patrick Harker from the Philadelphia Fed near 15:00 GMT.
- The US Treasury is scheduled to auction a 3-month and 6-month bill at 15:00 and 15:30 GMT.
- More Fed speakers round up this eventful Monday with John Williams from New York at 17:30 GMT and Loretta Mester from Cleveland at 23:30 GMT.
- Equities are slightly in the red in Japan with both the Topix and the Nikkei 225 dropping, less than 0.50%. European equities are ticking up, and US Futures are pointing to a firm green opening later this Monday.
- The CME Group FedWatch Tool shows that markets are pricing in a 69.2 % chance that the Federal Reserve will keep interest rates unchanged at its meeting in November. The sudden drop from the previous 81.7% comes with the print in PCE where a few elements saw inflation ticking up again.
- The benchmark 10-year US Treasury yield is lower at 4.60%, a bit in the middle of the range from last week between 4.50% and 4.68%.
US Dollar Index technical analysis: Gearing up for volatility
The US Dollar Index booked its eleventh straight weekly gain on Friday. There isn’t much reason for champagne and festivities though as it was a very close call with the Greenback starting to wobble on its pedestal. With a chunky batch of data set to come out this week, including the US jobs report on Friday as cherry on the cake, the DXY might see its rally come to an end.
The US Dollar Index opened around 106.21, though the overheated Relative Strength Index (RSI) is acting up again and heads back into an overbought regime. Traders that want to hit a new 52-week high need to be aware that a lot of road needs to be covered toward 114.78. Rather look for 107.19, the high of November 30, 2022, as the next profit target on the upside.
On the downside, the recent resistance at 105.88 should be seen as first support. Still, that barrier has just been broken to the upside, so it isn’t likely to be strong. Instead, look for 105.12 to do the trick and keep the DXY above 105.00.
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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