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- US Dollar starts off week asleep after last week’s questionable performance
US Dollar starts off week asleep after last week’s questionable performance
- The Greenback was able to print a weekly gain on Friday.
- A lighter week begins with only Retail Sales and Powell’s speech as focal points.
- The US Dollar Index was unable to print a new weekly high and might still reverse.
The US Dollar (USD) showcasing its resilience last week might leave traders and investors wrongfooted to start the coming week. Headline inflation might have ticked up a touch, pressing the market’s nerves with rates soaring back to 52-week highs as a result. Although the US Dollar Index (DXY) eked out a weekly gain on Thursday and Friday, it was yet again a very close call as the Greenback rally stutters here on Monday.
No big data points are scheduled on Monday, so expect fewer sharp moves in the market. One element to keep an eye on is Central Europe, where in Poland saw a big power shift happen on Sunday during elections. One of the opposition parties is set to gain a majority over the ruling party, and the Polish Zloty appreciated by over 1.5% against the Greenback. All Central European currencies, in fact, are up against the Greenback.
Daily digest: US Dollar knee jerks everyone
- At 12:30 GMT, the New York Empire State Manufacturing Index for October is due to come out: Previously, the print was 1.9, and a contraction is expected to -7.
- The US Treasury is set to issue a few auctions with a 3-month and a 6-month bill auction at 15:30 GMT.
- To round up the calm Monday, expect to see comments from Patrick Harker from the Federal Reserve of Philadelphia at 20:30 GMT.
- Equities are sliding lower with the Japanese Nikkei down over 2%. The Chinese Shanghai Shenzhen Composite slides over 1%. Meanwhile, European equities are rallying higher on that pro-European opposition in Poland set to claim victory in the Polish elections. US futures are mildly in the green.
- The CME Group’s FedWatch Tool shows that markets are pricing in a 90.2% chance that the Federal Reserve will keep interest rates unchanged at its meeting in November.
- The benchmark 10-year US Treasury yield soared to 4.68% and is ticking up a touch this Monday.
US Dollar Index technical analysis: Is the Greenback star fading?
The US Dollar might be popping back into its normal regime from the past few months by overtaking the summer rally trendline. Do not pop the champagne just yet though as no weekly high got printed. Meanwhile, the US Dollar Index (DXY) this Monday is opening below the closing price from Friday, which could point to some selling and might see the DXY fade lower in search of support.
A bounce above the daily trendline from July 18 might still materialise. On the topside, 107.19 is important to reach 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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