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- US Dollar jumps with rising yields ahead of event-packed week
US Dollar jumps with rising yields ahead of event-packed week
- DXY Index rose by 0.20% and consolidated above the 20-day SMA.
- Investors await the release of inflation data on Tuesday, ahead of the Fed’s decision on Wednesday.
- US Treasury bond auction might provide a push to yields later in the session.
The US Dollar (USD) is currently witnessing a strong uptrend, trading at 104.20, bolstered by rising yields and the cooling of dovish bets on the Federal Reserve (Fed) after the release of strong labor market figures last Friday. This week, the US will report November’s Consumer Price Index (CPI) figures, and the Fed meets on Wednesday.
Strong labor market signals and cooling inflation indicate inconsistency in the US economy. Despite these indicators, Federal Reserve officials are leaning toward a cautious stance, warning of further policy tightening. Tuesday’s inflation figures and fresh economic and interest rate projections on Wednesday will be key for markets to continue modeling their expectations of the bank's next decisions and will set the pace of US Dollar price dynamics.
Daily Market Movers: US Dollar holds gains, ahead of November’s CPI, Treasury auction
- The US Dollar is trading with gains, boosted by rising yields ahead of an eventful week ahead.
- On Tuesday, investors will pay close attention to November’s headline and Core Consumer Price Index (CPI). The first one is expected to have decelerated, while the latter remains sticky at 4%.
- The yields on US bonds are on an upward trend, with rates of 4.75% for the 2-year yield, 4.26% for the 5-year yield, and 4.28% for the 10-year yield.
- At 18:00 GMT, the US Treasury will auction notes 10-year tenures, which could drive yields up.
- According to the CME FedWatch Tool, market anticipation indicates no hike for Wednesday’s meeting. However, the markets are pricing in less easing for 2024.
Technical Analysis: DXY Index bulls step in and regain the 20-day SMA
On the daily chart, the Relative Strength Index (RSI) displays a positive slope in positive territory, reflecting an upward momentum for the Index. The Moving Average Convergence Divergence (MACD) illustratively endorses this bullish narrative, as rising green bars suggest that buying pressure is solidifying.
Considering the Index's positioning relative to the 20, 100 and 200-day Simple Moving Averages (SMAs), the situation offers further testament to this buyer-dominated environment. Despite being below the 100-day SMA, the index holding firm above both the 20 and 200-day SMA evinces the persistence of the buying force.
Support levels: 103.70 (20-day SMA), 103.50, 103.30.
Resistance levels: 104.50 (100-day SMA), 104.50, 104.70.
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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