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- US Dollar consolidates further ahead of US GDP data
US Dollar consolidates further ahead of US GDP data
- The US Dollar continues to trade mixed ahead of final US GDP data.
- Equity markets are shaky after Wednesday's 500-points drop in the Dow Jones.
- The DXY US Dollar Index is torn between risk-on mood and Fed speakers pushing back on rate cut bets.
The US Dollar (USD) trades broadly flat on Thursday after a very calm Asian session. From a technical point of view, the US Dollar Index (DXY) is likely to face a breakout soon, and lower liquidity ahead of Christmas could lead to large moves as the economic calendar gains momentum at the end of the week.
On the economic front, some heavyweight data is set to hit the markets on Thursday. All eyes will be on the third estimate of the US Gross Domestic Product (GDP) reading. Although not much movement is expected in this third reading, it could remind markets that the US economy is in good shape, putting the US Dollar back in favour of investors’ last bets before New Year.
Daily digest Market Movers: Big data ahead
- A very chunky batch of data will be released at 13:30 GMT:
- The third estimate of US Gross Domestic Product (GDP) numbers. Expectations are for economic growth to be unrevised at a 5.2% annualized rate in the third quarter. The Personal Consumption Expenditures Prices for the quarter is expected at 2.8% and the core measure is seen at 2.3%.
- Weekly Initial Jobless Claims are expected to pick up from 202,000 to 215,000.Continuing Claims are expected to rise from 1.876 million to 1.888 million.
- At 16:00 GMT, the Kansas Fed Manufacturing Activity Index for December will be published. The previous number was at -3.
- Equities are struggling for direction after US equities sold off in the last trading hour on Wednesday. Japanese equities saw profit taking, with more than 1% losses in both the Nikkei and Topix indexes. European indices are down by 0.50%, while US equities futures are up 0.50%.
- The CME Group’s FedWatch Tool shows that markets are pricing in an 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 3.86%, the lowest level since summer.
US Dollar Index Technical Analysis: Third-reading surprises
The US Dollar Index is in full consolidation mode. With clear lower highs and higher lows, buyers and sellers are pushed toward each other. A breakout looks primed for either Thursday (with the US GDP and Jobless Claims releases) or Friday (with Durable Goods and Personal Consumption Expenditures numbers). Either way, the US Dollar could still sink or rally by 1% into the last trading day before Christmas.
Any upbeat surprise in data that could contradict rate cuts bets or geopolitical events that trigger US Dollar inflow could still make the DXY head higher. 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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