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- US Dollar steadies as investors brace for US GDP, PCE data ahead of Christmas
US Dollar steadies as investors brace for US GDP, PCE data ahead of Christmas
- The US Dollar starts the week with a mixed performance.
- Traders are facing the last economic data points for 2023.
- The US Dollar Index recovered on Friday, though not enough to change sentiment.
The US Dollar (USD) trades broadly stable on Monday, licking its wounds after the sharp decline fuelled by the US Federal Reserve (Fed) Chairman Jerome Powell’s comments signalling that rate cuts are due in 2024. The US Dollar attempted on Friday to recover earlier losses, but it was still far from enough, putting the Greenback again at risk of further depreciating as markets overall bet on a weaker USD. Traders have started to consider a possible policy mistake by the European Central Bank (ECB) in Europe, but this isn’t reflected in the value of the US Dollar.
On the economic front, the calendar is light at the beginning of the week. Still, some important releases are ahead towards its end, before markets wind down for the Christmas llull. On Thursday, the final estimate of the US Gross Domestic Product (GDP) for the third quarter could move markets ahead of Friday. On the very last day ahead of Christmas, the Personal Consumption Expenditure (PCE) Price Index – the Fed’s preferred inflation gauge – will be released, along with the Durable Goods numbers for November.
Daily digest Market Movers: Policy mistakes
- Houthi rebels have again attacked a tanker in the Red Sea, forcing shipping companies to avoid the area and ships rerouted via longer routes.
- The Financial Times has published an article that shows that several developed countries, even Europe and the US, are struggling with higher-than-normal amounts of bankruptcies in businesses. In some countries like France and Japan, the ratio is up over 30% from its normal annual average. In some Nordic countries like Sweden and Finland, rates have exceeded levels not seen since 2008-2009’s global financial crisis.
- Main takeaway from last Friday were the preliminary Purchasing Managers Index (PMI) numbers for December: for the services sector, the European PMIs fell further into contraction, while US and UK PMIs went higher. With the ECB not committing to any cuts in 2024, European business activity could further deteriorate. Meanwhile, a soft landing scenario in the US could well be in the cards with the Fed having all tools at its disposal to support the economy and keep inflation under control.
- At 15:00 GMT, the National Association of Home Builders is due to release its monthly index for December. Previous was at 34, with 36 expected.
- The US Treasury Department is heading to markets to place a short-term 3-month and a 6-month bill at 16:30 GMT.
- A red start of this week for equities with Asia leading the decline. In Europe, the main indices are giving back some gains from last week, with the German Dax down 0.50%. US Futures are flat.
- The CME Group’s FedWatch Tool shows that markets are pricing in an 89.7% chance that the Federal Reserve will keep interest rates unchanged at its January 31 meeting. Around 10.3% expect the first cut already to take place.
- The benchmark 10-year US Treasury Note trades near 3.90%, and starts the week with another few basis points lower.
US Dollar Index Technical Analysis: Friday close paints ugly picture
From a technical perspective, the DXY US Dollar Index could be heading to 100.00 in the very short-term when looking at the weekly chart. Traders will see several rejections over the past four weeks against the 55-week Simple Moving Average (SMA) near 104.00. This firm rejection – with a substantial close lower last week – could mean that US Dollar bulls have given up for now, with the US Dollar Index (DXY) set to drop lower into the first week of 2024.
Still, US Dollar bulls could make a turnaround should the economic data this week provide upbeat surprises. On the daily chart, look for 103.00 as the first level to keep an eye on. Once trading above there, the 200-day SMA at 103.50 is the next important level to get to in its recovery.
To the downside, the DXY is due to test the next pivotal at 101.70, the low of August 4 and 10. Once broken, look for 100.82, which aligns with the bottoms from February and April. Should that level snap, nothing will stand in the way of DXY heading to the sub-100 region.
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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