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- US Dollar steadies as markets ignore increasing geopolitical risks
US Dollar steadies as markets ignore increasing geopolitical risks
- The US Dollar trades mixed ahead of more US housing data.
- Markets are not fleeing to safe havens on the back of Red Sea geopolitical tensions.
- The US Dollar Index is torn between risk-on mood and Fed speakers pushing back on rate cut bets.
The US Dollar (USD) trades sideways on Wednesday, a mixed trading day on the quote board. Markets are ignoring the geopolitical risk and inflationary pressures that might come on the back of the rerouting of vessels forced by recent attacks in the Red Sea. . Meanwhile, in the commodity space, Oil is soaring and OPEC+ is having a field day. The US Dollar Index is stuck just above 102.00, with the potential to move more sharply later this week on key US data.
On the economic front, there are not many top-tier numbers in the run-up to Thursday’s US Gross Domestic Product (GDP) data and Friday’s Personal Consumption Expenditures (PCE) Price Index. US Existing Home Sales might have some weight after the mixed data from Tuesday, which showed an increase in Housing Starts but a decline in Building Permits.
Daily digest Market Movers: No bets to be made anymore
- Colorado state has banned former US President Donald Trump from being on voting ballots in the upcoming Presidential elections. The State’s top court ruled that Trump was guilty of his role in the January 6 breach of Congress, which disqualifies him from running. This sentence can be upheld or reversed by the US Supreme Court.
- At 12:00 GMT, the Mortgage Bankers Association (MBA) was released.Previous number was 7.4% and declined by 1.5% this week.
- At 15:00 GMT, US Consumer Confidence for December is due. the previous reading was at 102, forecasts show 104.5.
- At the same time, Existing Home Sales data will be released. Previous was for 3.79 million, and a decline to 3.77 million is expected.
- Chicago Federal Reserve President Austan Goolsbee will be speaking near 17:00 GMT.
- Around 18:00 GMT, the US Treasury Department will allocate a 20-year bond auction.
- Equities are mixed. In Asia, the Japanese Nikkei closed up over 1%, while in China the Shanghai-Shenzhen index dropped over 1%. Europe is trading flat, with minor losses at hand.
- The CME Group’s FedWatch Tool shows that markets are pricing in a 87.6% chance that the Federal Reserve will keep interest rates unchanged at its January 31 meeting. Around 12.4% expect the first cut already to take place.
- The benchmark 10-year US Treasury Note trades near 3.89%, making another low since July.
US Dollar Index Technical Analysis: Entering calm water
The US Dollar Index is starting to consolidate looking at the daily chart. This points to both buyers and sellers being pushed toward each other, with lower highs and higher lows. Once the melting point has been reached, a breakout will take place either way, which fits with the US GDP numbers and PCE inflation being published on Thursday and Friday, respectively.
Still, US Dollar bulls have their work cut out to salvage what was lost last week. On the daily chart, look for 103.00 as the first level to watch. Once trading above there, the 200-day Simple Moving Average (SMA) at 103.50 is the next important level to get to.
To the downside, the pivotal level at 101.70– the low of August 4 and 10 – is vital to hold. 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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