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- US Dollar might fool markets after Powell’s speech
US Dollar might fool markets after Powell’s speech
- The US Dollar pops up on the back of Fed rate pause.
- Traders buy the Greenback after Powell pushes back on March rate cut.
- The US Dollar Index has 104 in reach if it is able to advance this Thursday.
The US Dollar (USD) pops higher on the back of the first rate decision from the US Federal Reserve and commentary from the US Federal Reserve Chairman Jerome Powell. Although Powell pushed back against a March rate cut, that a cut is coming did not get dismissed. In the same push-and-pull pattern markets have seen over the past few weeks, the current US Dollar strength looks to be a mere repricing of the timing of the rate cut, with risk of the US Dollar Index being unable to walk away from that 200-day Simple Moving Average near 103.55.
On the economic front, traders are making their way to the US Jobs Report on Friday, with the weekly Initial Jobless Claims out on Thursday. The other main event on Thursday is the latest data from the Institute of Supply Management (ISM). Thus a lot of manufacturing data and components are to hit markets later on Thursday.
Daily digest market movers: Manufacturing Thursday
- This Thursday kicks off with the Challenger Job Cuts for January around 12:30 GMT. Previous number was 34,817.
- Jobless Claims are due near 13:30:
- Initial Claims are are expected to stay stable, falling from 214,000 to 212,000.
- Continuing Claims are expected to head from 1.833 million to 1.84 million.
- S&P will release its Global Manufacturing Purchase Managers Index (PMI) for January around 14:45. Previous was at 50.3.
- At 15:00 the Institute of Supply Management (ISM) will release its January ISMManufacturing PMI numbers:
- Manufacturing is seen heading from 47.4 to 47.
- ISM Manufacturing Prices Paid is expected to head from 45.2 to 46.9.
- ISM Manufacturing New Orders Index was previously at 47.1, no forecast available.
- The Employment Index was at 48.1 with no consensus pencilled in.
- Around 16:30 the US Treasury Department will allocate a 4-week bill.
- Equity markets are very mixed with small gains in Europe and US futures mildly in the green. The UK FTSE 100 is trading flat ahead of its central bank meeting later on Thursday.
- The CME Group’s FedWatch Tool is now looking at the March 20th meeting. Expectations for a pause are 64.5%, while 35.5% calls for a rate cut.
- The benchmark 10-year US Treasury Note trades substantially lower to 3.94%, the lowest level for this week.
US Dollar Index Technical Analysis: 2024, same story
The US Dollar Index (DXY) has jumped higher in the aftermath of the Fed’s rate decision and Fed Chair Jerome Powell’s speech. Though, some parental advisory needs to come with this move as clearly a rally is not set to play out here. The Fed has done a good job on Wednesday to steer markets away from a rate cut in March and avoid a massacre, while rate cuts in May or June are becoming more plausible and logical, and do not require a hefty repricing of the US Dollar for that matter.
Should the US Dollar Index be able to finally break away from the 200-day Simple Moving Average (SMA) at 103.55, traders should look to the 100-day SMA near 104.30 as the next level. Should the US Jobs Report on Friday see its components all fall in favor of more US Dollar strength, expect to see another jump higher to 105.12. That would mean a fresh three-month-high for the DXY.
In the same push-and-pull scenario that the DXY has been performing for nearly half of January, it would be plausible that the US Dollar loses traction against most of its peers and the US Dollar Index retracts again. Expect to see first support from the 200-day SMA near 103.55 before heading to the 55-day SMA at 103. Should that last level snap, a nosedive move to 102.00 could very well be in the cards here.
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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