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- US Dollar retreats despite positive Jobless Claims, focus on Chair Powell’s speech
US Dollar retreats despite positive Jobless Claims, focus on Chair Powell’s speech
- The US Dollar consolidates Wednesday gains and trades soft against its main rivals.
- Jobless Claims from the second week of October came in lower than expected.
- The pace of markets will be set by Chair Powel’s words, who will be on the wires starting 16:00 GMT.
The US Dollar (USD) measured by the US Dollar DXY Index declined as the green currency consolidated Wednesday’s gains and failed to gather momentum on better-than-expected Jobless Claims from the second week of October. During the American session, Federal Reserve Chair Jerome Powell will be on the wires, where investors will look for further clues on forward guidance, which could affect the USD price dynamics.
The United States’ economic activity is strong, as revealed by the latest reports, including S&P Global PMIs, Industrial Production and Retail Sales. On Wednesday, the Federal Reserve’s Beige Book report described the US economic situation as “stable”, and as US Treasury yields stand at multi-year highs, investors may be gearing up for one last hike from the Fed in 2023. When he speaks, Chair Powell will likely give markets further insights into the Fed's stance.
Daily Digest Market Movers: US Dollar fails to gather momentum despite higher US yields and positive Jobless Claims
- The US Dollar DXY declined near 106.30, seeing 0.20% daily losses, still above the 20-day Simple Moving Average (SMA).
- Jobless Claims for the week ending on October 13 came in at 198,000, lower than the expected 212,000 and the previous 211,000.
- In the meantime, US yields rose back to multi-year highs, with the 2, 5 and 10-year rates increasing to 5.22%, 4.99% and 4.98% respectively.
- What seems to be weakening the US is investors taking profits from Wednesday’s gains and a slight improvement in the market’s mood.
- Focus shifts to Jerome Powell’s speech at 16:00 GMT for investors to continue placing their bets on the next Fed decisions.
- According to the CME FedWatch tool, the odds of a 25 bps hike in the December meeting stand near 40%.
Technical analysis: US Dollar Index’s bulls step back but hold the 20-day SMA
The DXY index is in an intermediate bullish trend on the daily chart, holding above the key 20,100 and 200-day Simple Moving Average (SMA).
As of late bears gained some momentum and threatened the 20-day Simple Moving Average (SMA) at 106.30. Indicators on the daily chart reveal a rising bearish traction but in case price fails to conquer the mentioned average, further upside may be on the horizon.
The Relative Strength Index (RSI) is looking weak and pointing south, though still above 50. The Moving Average Convergence Divergence (MACD) saw a bearish cross on October 5 though the trend lower flipped on October 12 when the market made a recovery. Given the dominant uptrend the market could still rally.
The pair has had a strong run higher, with 11 consecutive up-weeks in a row before peaking and forming a bearish doji/shooting star candlestick in the first week of October. This was not followed through to the downside, however, with the following week closing higher. Still it is a warning sign of potential weakness on the horizon.
Supports: 106.28 (20-day SMA), 106.00, 105.80.
Resistances:106.55, 107.00, 107.30.
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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