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- US dollar strengthens amid sour market mood and rising yields
US dollar strengthens amid sour market mood and rising yields
- The DXY index surged, trading with gains above the 200-day SMA at 103.70.
- Growing tensions between Israel and Hamas made investors seek refuge in the USD.
- Key US economic reports due this week: ISM Services PMI, ADP Employment Change, November Nonfarm Payrolls and the Unemployment Rate.
The US Dollar (USD) edged higher on Monday, with the Dollar Index (DXY) sailing past the 103.70 mark, above the 200-day Simple Moving Average (SMA) and pushing a sour market mood amid rising Treasury yields.
For the rest of the week, key drivers are on the horizon as investors eye Friday's release of Nonfarm Payrolls for November alongside the Unemployment Rate, while the ISM Services PMI is due on Tuesday and the Automatic Data Processing (ADP) Employment Change report on Wednesday.
Despite mixed signals from the US labour market and cooling inflation in the United States economy, Federal Reserve (Fed) officials indicated a possibility for further policy tightening, signifying a subtly hawkish stance. This week’s key labour market data will influence the modelling of expectations and the Fed's policy trajectory, which could define the short-term trajectory of the US Dollar.
Daily Market Movers: US Dollar on the rise ahead of labor market data
- The US Dollar is currently trading with gains, with the DXY Index showing a positive upward trend neatly tucked above 103.70.
- The US Dollar's upward trend appears largely driven by a sour market mood and rising bond yields.
- No significant reports have surfaced during the session that could impact the US Dollar's current trajectory.
- Market participants have their eyes set on key economic reports due this week. On the list are the Nonfarm Payrolls, the Unemployment Rate, ADP Employment Change and the ISM Services PMI updates, scheduled for release on Friday, Wednesday and Tuesday, respectively.
- Overall, all reports are expected to show that the job creation picked up in November, while the ISM Services PMI is seen accelerating regarding its last reading of October.
- US bond yields are edging higher, aligning with the Dollar's uptick. Specifically, the 2, 5 and 10-year yield rates are up, trading at 4.65%, 4.24%, and 4.29%, respectively.
- The CME FedWatch Tool indicates no hikes are priced in for the upcoming December meeting, and markets speculate on rate cuts in mid-2024.
Technical Analysis: US Dollar struggles amid negative territory RSI and subdued SMAs
The indicators on the daily chart are reflecting a predominance of selling momentum. The index position, below the 20 and 100-day Simple Moving Averages (SMAs), indicates that the bears are maintaining control. This control is also noticeable from the Relative Strength Index (RSI), which shows a positive slope but remains in negative territory. This reveals that although buyers are gaining some strength, they are yet to overpower the sellers.
Meanwhile, the Moving Average Convergence Divergence (MACD) signifies decreasing red bars, adding further evidence of shrinking selling momentum. This deceleration is credited to the bears taking a breather after driving the index to its lowest level since last August.
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Support levels: 103.60, 103.30, 103.15, 103.00.
Resistance levels: 104.10 (20-day SMA), 104.40 (100-day SMA), 104.50.
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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