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- US Dollar sees mild losses ahead of PCE data
US Dollar sees mild losses ahead of PCE data
- DXY Index sees mild losses and trades around 103.20.
- Key US inflation and economic activity data are due this week .
- Market bets on the Fed cutting rates continue to adjust.
The US Dollar (USD) is currently trading at a mild loss at 103.25. This slight dip comes in light of a quiet session ahead of an eventful week.
The US economy remains robust with consistently firm data suggesting potential growth in Q4 and likely stability in Q1 2024. Regarding the Federal Reserve, market expectations have adjusted with the market anticipating approximately 125 basis points (bps) of easing over the course of 2024, compared to nearly 175 bps anticipated earlier that gave the Greenback a lift earlier in January. Core Personal Consumption Expenditures (PCE) may shape the short-term expectations from the Fed and are set to be released on Friday.
Daily Digest Market Movers: US Dollar under mild pressure on quiet session, eyes on PCE and GDP data
- On Thursday, the US will release December Personal Consumption Expenditures (PCE) data, which is expected to show that inflation has stagnated. Gross Domestic Product (GDP) figures from Q4 are also due that day and markets expect the economic activity to have cooled off.
- US Treasury yields are in a downturn with the 2-year yield at 4.37%, the 5-year yield at 4.02%, and the 10-year yield at 4.10%.
- The CME FedWatch Tool indicates the odds of a rate cut in March have fallen to 50%. No policy changes are expected in next week’s Fed meeting.
Technical Analysis: DXY bullish momentum wanes, fails to hold above 200-day SMA
The Relative Strength Index (RSI) in flat and positive territory hints toward a neutral stance in the current market dynamics, not leaning distinctly toward either buyers or sellers. Paired with the flat green bars of the Moving Average Convergence Divergence (MACD), this suggests a minor bullish momentum waiting in the wings for DXY, especially as it implies a diminishing seller's market.
The positioning of the DXY in relation to the Simple Moving Averages (SMAs) provides a more detailed picture of the market trend. The presence above the 20-day SMA reveals that buyers have basic control in the short term. However, The DXY’s positioning below the 100-day and 200-day SMAs indicates that sellers hold dominance in the long run.
Support levels: 103.20, 103.00, 102.80.
Resistance levels 103.40 (200-day SMA), 103.60, 103.80.
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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