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- US Dollar comes to a halt on light Wednesday data
US Dollar comes to a halt on light Wednesday data
- The US Dollar comes at a halt with some minor gains for this week’s performance.
- Traders are on the lookout for any guidance from Fed’s Williams.
- The US Dollar Index remains above 102.00, clinging on to weekly gains.
The US Dollar (USD) trades steady with markets easing a touch. Traders will want to stay out of the market ahead of the main event on Thursday when the US inflation will be printed in the form of the Consumer Price Index (CPI) numbers. Expectations have never been higher as another slowdown in the numbers will make the Federal Reserve (Fed) more likely to cut interest rates sooner, rather than later, and vice versa.
On the economic front, rather a light calendar with the only notable point the upcoming speech from New York Federal Reserve President John Williams. Known to be a very neutral person, in regards to his stance at the Federal Open Market Committee (FOMC), any hawkish or dovish comments could trigger a market reaction. He is due to speak near 20:15 GMT this Wednesday.
Daily digest market movers: Fed to guide
- At 12:00 GMT, the Mortgage Bankers Association (MBA) has released its weekly Mortgage Applications number. The last week of December registered -10.7% with a positive 9.9% for the first week of January.
- Near 15:00 US Wholesale Inventories are due to be released. Expectation is a steady -0.2% for November.
- The US Treasury is heading to markets yet again, for a 10-Year Note Auction near 18:00 GMT.
- Main event for this Wednesday will take place around 20:15 GMT with a speech from New York Fed member John Williams.
- Equity markets are mixed again on Wednesday, with Japan soaring further while its Nikkei prints new all-time highs. China is coming off worse with negative results while traders await further stimulus packages from the Chinese government before buying into Chinese equities. European and US equities are in the green, overall near 0.50%.
- The CME Group’s FedWatch Tool shows that markets are pricing in a 95.3% chance that the Federal Reserve will keep interest rates unchanged at its January 31 meeting. Around 4.7% expect the first cut already to take place.
- The benchmark 10-year US Treasury Note holds near 4%, with pressure building for rates to decline. This could mean that the US Dollar is set to weaken soon.
US Dollar Index Technical Analysis: Dead calm
The US Dollar is coming to a halt after printing a nice profit on Tuesday, according to the US Dollar Index (DXY). While those gains are reversing again this Wednesday, it is becoming clear that the DXY will go nowhere until the main event of this week, the US CPI print on Thursday. No big waves are expected this Wednesday, unless a catalyst pops up and shakes the tree by surprise.
The first level to watch on the upside is 103.00, which falls nearly in line with the trend line from the top of October 3 and December 8. If broken and closed above, the 200-day Simple Moving Average (SMA) at 103.43 comes into play. The 104.00 level might be too far off, with 103.78 (55-day SMA) coming in as the next resistance.
To the downside, a rejection by the descending trendline will give fuel to Greenback bears leading to a further downturn. The line in the sand here is 101.74, the floor which held halfway through December before breaking down in the last two weeks. In case the DXY snaps this level, expect to see a test at the low near 100.80.
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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