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- US Dollar starts the week on the defensive, markets await PCE inflation data
US Dollar starts the week on the defensive, markets await PCE inflation data
- The DXY Index is witnessing mild losses after concluding its weakest week in over a month.
- US PCE inflation report and housing data are next on the investors' radar.
The US Dollar (USD) took a slight downturn in the early part of the week, bracing itself before the release of the Personal Consumption Expenditures (PCE) Price Index data on Friday, which is the Federal Reserve (Fed) preferred gauge of inflation. Inflation figures will give additional insights to investors to continue placing their bets on the next Fed decisions. The US Dollar Index is trading at the 102.50 area, 0.1% down on the day.
In the last 2023 meeting, the Fed's dovish stance emerged, with officials forecasting 75 bps of rate cuts for 2024, recognizing that inflation is softening, which fueled risk on flows that significantly pushed the DXY downwards. However, markets may be overhyped with the dovish surprise, as the bank may consider delaying cuts if inflation remains sticky, so Friday’s figures will be important.
Daily Market Movers: US Dollar remains weak on the back of the Fed’s dovish surprise
- The US Dollar experienced mild losses as the week kicked off, with traders awaiting the release of the PCE Price Index data.
- The US will report mid-tier housing figures on Tuesday and Wednesday that may impact Greenback’s price dynamics.
- The Q3 Gross Domestic Product final revision is due on Thursday.
- In the meantime, US bond yields are trending upwards, with the 2-year yield at 4.44%, the 5-year yield at 3.95%, and the 10-year yield at 3.95%, which may limit the downside of the US Dollar.
- The CME FedWatch Tool insights indicate that markets are considering possible rate cuts by March 2024.
Technical Analysis: DXY index shows a bearish short-term outlook, sellers maintain control
The indicators on the daily chart reflect a stronger selling momentum on the DXY. The Relative Strength Index (RSI) is in negative territory with a downward slope, indicating an inherent bearishness in the index. The red bars of the Moving Average Convergence Divergence (MACD) further confirm this bearish momentum.
The position of the index with respect to its 20, 100, and 200-day Simple Moving Averages (SMAs) also highlights the continuing dominance of the bears. The DXY trading beneath all these SMAs implies a strong downward bias, affirming the bearish undertone.
Support levels: 102.00,102.30, 101.50.
Resistance levels: 103.45 (20 and 200-day SMA bearish crossover), 104.60 (100-day SMA), 104.80.
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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