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- US Dollar edges higher amid Middle East tensions, dovish Fed may limit the upside
US Dollar edges higher amid Middle East tensions, dovish Fed may limit the upside
- The DXY Index recovered towards the 102.30 area, seeing 0.20% daily gains.
- Medium-tier US housing data failed to trigger a significant reaction on the USD.
- Middle East tensions led to Greenback demand.
The US Dollar (USD) broke ground trading on an upbeat 102.30 with 0.20% daily gains. Middle East tensions drove demand for the Greenback but the Federal Reserve's (Fed) dovish stance may limit the bull’s momentum.
The Federal Reserve's stance showed a surprising dovishness in last week’s decision, indicating no rate hikes in 2024 and plans for a 75 bps of easing due to the cooling inflation levels. However, the bank’s decision expectations may remain sensitive to incoming data. The Q3 Gross Domestic Product (GDP) is due on Thursday, and on Friday, the US will release November’s Personal Consumption Expenditures (CPE) Price Index, the Fed’s preferred gauge of inflation.
Daily digest market movers: US Dollar edges higher in quiet pre-holiday session
- The National Association of Realtors (NAR) reported a modest increase in US Existing Home Sales in November by 0.8%, slightly defying expectations.
- Upcoming economic reports include the headline and core US Personal Consumption Expenditures (PCE) Price Index, which are expected to have decreased in November.
- US bond yields currently show a declining trend. Rates for the 2-year yield stand at 4.41%, the 5-year yield at 3.91%, and the 10-year yield at 3.90%.
- The CME FedWatch Tool demonstrates that markets are anticipating rate cuts in March 2024.
DXY Technical Analysis: Bearish control loosens on DXY Index
The indicators on the daily chart reflect a significant bearish control over the market; however, there are also hints of potential dwindling bearish momentum. The Relative Strength Index (RSI) is in negative territory yet is displaying a positive slope. This may suggest that selling momentum is starting to wane, and buyers may be slowly stepping in.
The Moving Average Convergence Divergence (MACD) shows flat red bars, indicating that though the selling pressure maintains its presence, it's not strengthening.
The Simple Moving Averages (SMAs) suggest that the overall course is downward, with the index perched below its 20,100 and 200-day SMAs. Despite this, the bears seem to be taking a breather after pushing the index to multi-month lows, possibly providing additional space for buyers to step in.
Support levels: 101.80,101.50, 101.30.
Resistance levels: 103.30 (20-day SMA), 103.50 (200-day SMA), 104.00.
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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