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- US Dollar pops with Trump booking landslide victory in Iowa Caucus
US Dollar pops with Trump booking landslide victory in Iowa Caucus
- The US Dollar trades in the green across the board on Tuesday with US markets set to open this week.
- Traders are buying into the Greenback after Trump claims victory in Iowa.
- The US Dollar Index jumps to 103 and snaps out of the technical selling area.
The US Dollar (USD) is breaking eggs this Tuesday with markets trembling on the outcome of the first Caucus election for the Republican Party (GOP) candidate who will pick up the gloves against Joe Biden in the presidential runoff later this year. Former US President Donald Trump won with a clear landslide victory of nearly 51%. Iowa bears a lot of importance because in the past, Trump was not able to win the state’s support in previous Caususses.
This result could mean that Trump could book further landslide wins in other states where he already has enough votes and supporters to become the only main candidate for the GOP. Meanwhile on the calendar front, traders are bracing for a speech from US Federal Reserve member of the Board of Directors Christopher Waller, due later this Tuesday. His dovish comments in November moved the markets substantially, triggering substantial US Dollar weakness throughout December.
Daily digest market movers: It’s Monday for the US
- The World Economic Forum in Davos is entering its second day with a lot of headline risk from senior people – central bankers and leaders – making comments, statements and holding interviews.
- It is a very light US calendar, with the New York Empire State Manufacturing Index due near 13:30 GMT. The previous number was -14.5 with a contraction of -5 expected in January.
- The US Treasury is heading to the short-term funding part of the market to allocate a 3-month and a 6-month bill tender near 15:30.
- Right at the end of this Tuesday, US Fed’s Waller is due to speak near 16:00. Should he turn hawkish and push back on his earlier statement from November, that could mean more gains for the US Dollar.
- Equity markets are in a bad mood and are selling off with the Hong Kong Hang Seng Index dropping over 2%. European equities are down near 1% while US futures are opening on the downside by half of one percent.
- 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 return to 95.3% unchanged fits with the US yield jumping a few basis points higher.
- The benchmark 10-year US Treasury Note jumps to 3.99% with Bond trading coming online again in Asia on Tuesday morning.
US Dollar Index Technical Analysis: Snap goes the trend line
The US Dollar Index (DXY) pops out of the selling pressure and suddenly has the road wide open for more upside. The jump comes on the back of headlines that confirmed Donald Trump as the big winner in Iowa in the first Caucus election for the Republican Party. The move comes as this is a crucial state where Trump in the past was unable to win, and could mean that other Primaries are becoming redundant with the US gearing up for a Trump-Biden election battle for the White House seat in November.
With the descending trend line being firmly broken, a short squeeze could get underway with the DXY running up higher and squeezing out the traders who sold the Greenback alongside the descending trend line from October 2023. Even 102.90 got broken and offers a window of opportunity to head to 103.44 and 103.49, where the 55-day and the 200-day Simple Moving Averages (SMA) are residing respectively. Should even those get broken later this week, expect to see a stretched rally up to 104.44 towards the 100-day SMA.
In case a turnaround unfolds, expect a drop back to the descending trend line near 102.67. Should the US Dollar reenter below that descending trend line, expect to see a quick sell-off towards 102.00 first and next 101.00 before testing the low near 100.82.
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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