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- US Dollar sets sail towards negative weekly close
US Dollar sets sail towards negative weekly close
- The Greenback lost substantially on Thursday after Powell did not bring anything new to the table.
- A very light data calendar on Friday offers room for traders to digest past week events.
- The US Dollar Index strengthened somewhat on Friday amid escalating tensions in the Middle East.
The US Dollar (USD) lost substantial ground in the aftermath of the speech from US Federal Reserve Chairman Jerome Powell on Thursday. Powell’s remarks did not hold any meaningful new elements, mainly repeating ideas from the most recent FOMC meeting. Markets were quick to sell the Greenback, sending the US Dollar to peak to 1.0620 against the Euro.
However, there was a quick turnaround overnight as geopolitical tensions in the Middle East took over. A military base in Southern Syria, where US soldiers were housed, came under fire. At that same time reports came in that the US Navy destroyer USS Carney had shot down multiple Houthi missiles. With very light economic data at hand, it is expected that traders will be on edge for any reactions and possible retaliations of the US in the region.
Daily digest: US Dollar thrives in geopolitics
- Philadelphia Fed President Patrick Harker is the last Fed member to speak before the start of the blackout period of the next FOMC meeting to take place on November 1. Look for possible comments from Harker at 13:00 GMT.
- Last data point on the calendar is later this Friday with the Baker Hughes US Oil Rig Count around 17:00 GMT. The previous number was at 501.
- Equities are again not dealing well with the recent and overnight headlines: Asian indexes are down near 0.50%. European equities are deep in the red, registering losses of more than 1%, while US equity futures are declining by around 0.50%.
- The CME Group’s FedWatch Tool shows that markets are pricing in a 98.5% chance that the Federal Reserve will keep interest rates unchanged at its meeting in November.
- The benchmark 10-year US Treasury yield trades at 4.93%, a few basis points lower from the near 5% where it was trading earlier. With geopolitical tensions soaring and possibly the US starting to play a more active role in the field, demand for bonds might further increase.
US Dollar Index technical analysis: Stuck and going nowhere
The US Dollar is being torn in two, based on its performance for the week in the US Dollar Index (DXY). On the one hand, the geopolitical situation in the Israel-Palestine region is asking for more US Dollar strength, while recent Fed communication and the slowdown in certain economic numbers asks for a weaker Greenback. It will be a push-and-pull scenario with no clear path going forward.
A bounce above the daily trendline from July 18 might still materialise, although this level is starting to slip further away. On the topside, 107.19 is an important level to reach. 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 fails to do the trick, 104.33 will be the best level to look for 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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