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- US Dollar rallies for second straight day on China outlook, ECB policy shift
US Dollar rallies for second straight day on China outlook, ECB policy shift
- The US Dollar soars as Moody’s downgrades China credit outlook.
- Traders brace for ISM Services PMI and Jolts data on Tuesday.
- The US Dollar Index jumps to 104.00, snapping crucial resistance levels.
The US Dollar (USD) appreciates significantly in the European trading session on Tuesday after rating agency Moody’s downgraded China’s credit outlook from stable to negative due to rising debt. More US Dollar Strength comes from European Central Bank (ECB) member Isabel Schnabel, who said she is surprised by the substantial decline in inflation and no more interest-rate hikes are further needed.
On the economic front, the calendar is starting to pick up some steam with the Institute for Supply Management (ISM) Services PMI on the wires this Tuesday. Traders will also get to see how healthy the demand for labor is with the US JOLTS job openings data. The S&P Global Purchasing Managers numbers are not expected to move the needle, though any beat on expectations might give the US Dollar more impulse.
Daily digest: Pressure building to Nonfarm Payrolls
- Rating agency Moody’s has issued a negative outlook for China, a downgrade from the previous “stable” label.
- European Central Bank (ECB) board member Isabel Schnabel said that she is surprised by the shere speed of decline in inflation in the Eurozone, and no further hikes should be needed. Schnabel is considered to be a hawk, which makes these comments even more important and signals a change in the stance and outlook of the ECB.
- At 13:55 GMT, the Redbook Index is due to be released. Previous was at 6.3%.
- At 14:45 GMT, the S&P Global Purchasing Managers Indices are expected:
- The Services PMI is expected to stay stable from its preliminary reading at 50.8.
- The Composite flash reading for November stood at 50.7.
- Chunky batch of data at 15:00 GMT:
- The Institute for Supply Management (ISM) will release its November numbers:
- Headline Services PMI for November expected to increase from 51.8 to 52.
- Services Employment Index for October was at 50.2. No forecast.
- Services New Orders Index for October was at 55.5. No forecast pencilled in.
- Services Prices Paid for October was at 58.6. No forecast.
- JOLTS Job Openings for October is expected to decline a little from 9.553 million to 9.3 million.
- Equities are bleeding severely this Tuesday with nearly all Asian equity indices down over 1%, with China’s leading indices down more than 2%. European equities are trading in the red, and US futures trade directionless.
- The CME Group’s FedWatch Tool shows that markets are pricing in a 97.5% chance that the Federal Reserve will keep interest rates unchanged at its meeting next week.
- The benchmark 10-year US Treasury Note steadies at 4.23%. Yields in Europe, on the other hand, are falling.
US Dollar Index technical analysis: Back to summer levels
The US Dollar trades around 103.74 and has the next level, 104.00, in sight. Elements like the sudden shift to no-hikes from the ECB widens further the rate differential between the US Dollar and other currencies. In this favourable context, the US Dollar Index (DXY) is rallying as well. With a few landmark resistances being challenged and broken, more room for Dollar strength is in the pipeline.
The DXY has performed a daily close on Monday and an opening just above the 200-day Simple Moving Average (SMA), which is near 103.58. The DXY could still make it further up, should employment data trigger rising US yields again. A two-tiered pattern of a daily close lower followed by an opening higher would quickly see the DXY back above 104.28, with the 200-day and 100-day SMA turned over to support levels.
To the downside, historic levels from August are coming into play, when the Greenback summer rally took place. The lows of June make sense to look for some support, near 101.92, just below 102.00. Should more events take place that initiate further declines in US rates, expect to see a near-full unwind of the 2023 summer rally, heading to 100.82, followed by 100.00 and 99.41.
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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