The US Dollar (USD) roars with the US Dollar Index (DXY) popping above a few important technical levels. The move comes with markets finally realizing that rate cuts will not take place before June for either the US Federal Reserve (Fed), the European Central Bank (ECB) and the Bank of England (BoE). US Federal Reserve member Christopher Waller backtracked on his comments from early November and nuanced that rate cuts will come, though only when inflation does not pick up again.
On the economic front there will be a lot to digest, with a bulk release near 13:30 GMT when US Retail Sales comes out. Meanwhile headlines are being released out of Davos where the World Economic Forum (WEF) is taking place. When that is still not enough, traders can dig their teeth into no less than three Fed speakers throughout this Wednesday.
The US Dollar Index (DXY) has made a run for it and is trading near the mid-103 area. A crucial point with no less than two important moving averages being nearby and both just a few pips away from each other. From a pure technical angle, if the DXY can pull off a daily close above these two moving averages, the Greenback can gain no less than 1% towards 104.45.
The DXY is trading near the 55-day and the 200-day Simple Moving Averages (SMA) at 104.45. In case the DXY can get through that area, look for 104.44 as the first resistance level on the upside, in the form of the 100-day SMA. If that gets scattered as well, nothing will hold the DXY from heading to either 105.88 or 107.20, the high of September.
The break from this Wednesday could turn into a bull trap, where US Dollar bulls are caught buying into the Greenback when it broke above both the 55-day and the 200-day SMA in early Wednesday trading. Price action would decline substantially and force US Dollar bulls to sell their position at a loss. This would see the DXY first drop to 102.60 at the ascending trend line from September. Once threading below it, the downturn is open to head to 102.
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.
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.
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.
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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