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- US Dollar strengthens ahead of key US macro data
US Dollar strengthens ahead of key US macro data
- The Greenback is trading back firmer against several major peers.
- US yields retreat further, back to more favourable levels for the Greenback.
- The US Dollar Index broke back above 106.00 and is set to have a calm trading day.
The US Dollar (USD) made a staggering return on Tuesday and looks to consolidate these gains on Wednesday. The US Dollar Index was close to post a new high for this trading week, though it retreated just near the US closing bell as Microsoft earnings missed estimates and Alphabet soared. The US Dollar is expected to trade in a rather tight range on Wednesday ahead of the European Central Bank meeting on Thursday.
On the economic data front, a very light calendar is at hand for Wednesday, with no real catalytic moves expected. The only element at play will be the New Home Sales data. Although US Federal Reserve (Fed) Chairman Jerome Powell is set to deliver a speech, it will be only opening remarks, introducing 2023 Moynihan Prize recipient Alan Blinder at the 2023 Moynihan Lecture in Social Science and Public Policy in Washington.
Daily digest: US Dollar enters calm before the storm
- First print for this Wednesday comes around 11:00 GMT, with the Mortgage Bankers Association (MBA) issuing their weekly Mortgage Applications. Mortgage applications contracted 6.9% a week earlier.
- At 14:00 GMT, the New Home Sales number will be issued. Expectations are for a broadly steady number, from previous 0.675 million to 0.68 million.
- The Energy Information Administration (EIA) is due to release the weekly crude stockpile changes. The previous week saw a drawdown of 4.491 million barrels, and expectations are for a small build of 0.239 million barrels for this week.
- The US Treasury will auction a 5-year Note at 17:00 GMT.
- Equities are up in Asia, with both Japan and China seeing their star indices topping over 0.5%. European and US futures are struggling more following the mixed earnings from Alphabet and Microsoft after the US closing bell on Tuesday. Investors are looking forward to Meta’s earnings after the US closing bell this Wednesday.
- The CME Group’s FedWatch Tool shows that markets are pricing in a 99.6% chance that the Federal Reserve will keep interest rates unchanged at its meeting in November.
- The benchmark 10-year US Treasury yield trades at 4.83% and is back at levels where markets feel more at ease. With the retreat away from 5%, the US Dollar has been able to strengthen again.
US Dollar Index technical analysis: Kings don’t die that easily
The US Dollar is playing chess with the markets: while markets on Monday thought they had a check-mate game against the Greenback, on Tuesday it cleared out the playing board by knocking over nearly all pawns that markets had against it. The US Dollar Index (DXY) is back to flat for the week and with ECB, US GDP and US PCE still to come, the DXY could swing in any direction.
The DXY is consolidating above 106.00 and looks to keep it in a tight range today as no real market moving events are at hand for this Wednesday. Look for a possible jump above 106.42, the high of last Friday. If that level can be reclaimed by US Dollar bulls, then look for 107.00 on the topside again.
On the downside, the recent resistance at 105.88 did not do a good job supporting any downturn and now completely has lost its importance. Instead, look for 105.12, which is a pivotal historic line and almost falls in line with the 55-day Simple Moving Average (SMA) to keep the DXY above 105.00, and which worked already quite ahead of it on Tuesday. Should that fail to do the trick, a big air pocket could develop and see the DXY drop to 103.74, near the 100-day SMA before finding ample support.
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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