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- US Dollar shows signs of retreat as Indian summer rally ends on Tuesday
US Dollar shows signs of retreat as Indian summer rally ends on Tuesday
- The Greenback is losing steam against most major peers for this week.
- All eyes are on PPI numbers this Wednesday, CPI on Thursday.
- The US Dollar Index settles below 106 and could result in more losses with the longer-term rally ending overnight.
The US Dollar (USD) sees markets looking beyond recent developments in Israel and Gaza. It appears that several countries and participants around this war do not want to see further escalation of violence. This means, for now, a proxy war is out of the way. Safe havens are starting to abate with the Swiss Franc and the Greenback retreating to weaker levels.
Meanwhile, traders have used the brief moment of US Dollar strength on Monday to sell the US Dollar, steering it substantially lower throughout Tuesday, after comments from several Federal Reserve officials signaled the Fed is done hiking. With Producer Price Index (PPI) numbers today and Consumer Price Index (CPI) data on Thursday, markets will now look for clues if the Greenback needs to be devalued even more and might see the US Dollar Index (DXY) print more losses later this week.
Daily digest: US Dollar wounded
- At 11:00 GMT, the Mortgage Bankers Association (MBA) will issue its weekly Mortgage Applications Index. Previous number was at -6% week-on-week.
- Near 12:30 GMT the main event for Wednesday arrives with the Producer Price Index numbers. For the monthly gauge, expectations are for it to head from 0.7% to 0.4%. The yearly number is expected to stay stable at 1.6%. The monthly Core PPI, without Food and Energy, is expected to stay stable at 0.2%. The yearly Core PPI is expected to head from 2.2% to 2.3%.
- Christopher Waller from the Board of Governors at the Fed is due to speak at 14:15 GMT. Raphael Bostic from the Atlanta Fed will be taking the stage near 16:15 GMT.
- The US Treasury is looking for some funding in the market. This time the 10-year note is up for auction at 17:00 GMT.
- Traders can look for clues or confirmation on the possible end of rate hikes with the Fed’s latest FOMC minutes due at 18:00 GMT.
- Equities are a bit mixed with Asian stocks up and European stocks down. That last one is not a big surprise after the substantial surge European equities had on Tuesday. It must be some small profit-taking action there. US equity futures are flat and hold on to Tuesday’s gains.
- The CME Group FedWatch Tool shows that markets are pricing in an 84.3% chance that the Federal Reserve will keep interest rates unchanged at its meeting in November.
- The benchmark 10-year US Treasury yield trades at 4.63%, which is still in the lower range of this week.
US Dollar Index technical analysis: Did it fall off its pedestal?
The US Dollar snapped a very important trendline on the US Dollar Index chart. This is true for both the weekly and the daily time frames. The Indian summer rally that started in July and extended all the way up to last week came to an end with the DXY breaking below the respected trendline from throughout that period. From a pure technical point of view, this means some US Dollar weakness will further take place before initial support is met.
The DXY opens below 106, which means that that will be the first initial hurdle to recapture. On the topside, 107.19 is important to see if the DXY can get a daily close above that level. If this is the case, 109.30 is the next level to watch.
On the downside, the recent resistance at 105.88 did not do a good job supporting any downturn. Instead, look for 105.12 to keep the DXY above 105.00. If that does not do the trick, 104.33 will be the best level to look for some resurgence in US Dollar strength with the 55-day Simple Moving Average (SMA) as a support level.
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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