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- US Dollar recovers on the back of concern about earnings
US Dollar recovers on the back of concern about earnings
- The Greenback adds a third straight day of gains in its recovery attempt.
- Traders will be looking for clues and guidance from Fed Chairman Powell.
- The US Dollar Index is still in the 105-region, with still more room to the upside to recover from last week's decline.
The US Dollar (USD) is starting to recover, but it looks to be for all the wrong reasons. As the earning season is coming to an end, traders are now starting to draw a global picture of the US, and ergo, the world’s economy. With several big names disappointing and recently the bigger retailer discounters showing rising profits, it reveals that the current elevated rate environment is eating into people’s wallets and the US is at bigger risk than ever of falling into a recession together with the rest of the world.
On the economic data front, traders will want to hear from US Federal Reserve Chairman Jerome Powell later this Wednesday. More Fed speakers are due to speak at the end of this Wednesday and could paint a clearer picture of the concerns the Fed has at the moment and if a recession is part of that.
Daily digest: US Dollar all about the Fed
- Around 12:00 GMT, the weekly Mortgage Applications index will be released by the Mortgage Bankers Association (MBA). The previous print for the index was -2.1%.
- US Federal Reserve Chairman Jerome Powell is due to speak at 14:15 GMT.
- Near 15:00 GMT the US Wholesale Inventories are due to come out. The previous number was at 0%, and 0% is expected.
- The US Treasury will try to allocate a 10-year note in the markets near 18:00 GMT.
- Two Fed speakers are expected at the end of the US session with John Williams from the New York Fed at 18:40 GMT and Philip Jefferson from the Board of Governors of the Fed at 21:45 GMT.
- Asian equities are yet again in the red, though less severe. Europe and the US are not doing any better. The red numbers are the result of better than expected earnings from the top three US retail discounters in the US, which means that US consumers are looking for cheap alternatives instead of paying full price for goods and services.
- The CME Group’s FedWatch Tool shows that markets are pricing in a 90.4% chance that the Federal Reserve will keep interest rates unchanged at its meeting in December.
- The benchmark 10-year US Treasury yield trades at 4.59%, finding some calmer ground after last week’s volatility.
US Dollar Index technical analysis: US Dollar driven by Fed this Wednesday
The US Dollar is back in grace as an alternative and safe haven as investors are asking whether the world is heading – or is already – in a recession. The element that underpins this thesis comes as US earnings this week revealed that retail discounters have seen increased productivity and earnings in their recent quarter. The US consumer is feeling the pain of elevated rates, which means soon something will snap in the economy.
The DXY was looking for support near 105.00, and has been able to bounce ahead of it. Any shock events in global markets could spark a sudden turnaround and favour safe-haven flows into the US Dollar. A rebound first to 105.85 would make sense, a pivotal level from March 2023. A break above could mean a revisit to near 107.00 and recent peaks printed there.
On the downside, 105.10 is still acting as a line in the sand. Once the DXY slides back below that, a big air pocket is opening up with only 104.00 as the first big level where the 100-day Simple Moving Average (SMA) can bring some support. Just beneath that, near 103.50, the 200-day SMA should provide similar underpinning.
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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