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- US Dollar reverses its course despite negative Jobless Claims
US Dollar reverses its course despite negative Jobless Claims
- DXY Index recovered back above 101.00 after bottoming at 100.60.
- US Weekly Jobless Claims rose in the third week of December.
- US bond yields slightly recovered but remain at their lowest levels in months.
The US Dollar (USD) recovered to the 101.10 area during the American session after hitting a low of around 100.60. However, dovish bets on the Federal Reserve (Fed) and negative US Jobless Claims figures may limit the upside. In addition, US bond yields edged higher, which favored the Dollar's bounce, but they still remain at multi-month lows.
In its last 2023 meeting, the Federal Reserve acknowledged a slowdown in inflation, confirming that there won’t be rate hikes in 2024 while hinting at 75 bps of easing. The market is now pricing in a rate cut in March and another in May. The dovish bets were also fueled by US Personal Consumption Expenditures (PCE) Price Index figures last week, the Fed’s preferred gauge of inflation, as further evidence of the economy cooling down drove down the US Dollar.
Daily digest market movers: US Dollar with mild gains, cooling inflation and weak labor market may limit the upside
- Dovish bets on the Federal Reserve (Fed) due to cooling inflation are the main reason the USD suffered selling pressure in the last sessions.
- In terms of job data, the US Initial Jobless Claims report from the US Department of Labor came in at 218K vs the 210k expected in the week ending December 22.
- Next week, the US will report key labor market data, including a Nonfarm Payrrols report from December which could dictate the pace of the US Dollar for the short term.
- US bond yields are slightly recovering. The 2-year yield is at 4.26%, the 5-year yield is at 3.83%, and the 10-year yield is at 3.82%.
- Overall, markets are pricing in 160 bps of easing in 2024 vs the median of the Federal Open Market Committee (FOMC) of 75 bps.
Technical Analysis: DXY selling pressure persists despite oversold conditions
The Relative Strength Index (RSI) indicates oversold conditions in the DXY, which would traditionally be a buying signal, as it suggests the asset could be undervalued. Meanwhile, the Moving Average Convergence Divergence (MACD) shows rising red bars, which points out an increasing bearish momentum.
Given that the index is trading below all three key Simple Moving Averages (SMAs) – the 20, 100, and 200-day SMAs – this may serve as a confirmation of a bearish market and that this downtrend could continue.
Support levels: 100.70, 100.50, 100.30.
Resistance levels: 101.15, 101.30, 101.50.
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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