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- US Dollar easing with Presidents’ Day making it a long weekend
US Dollar easing with Presidents’ Day making it a long weekend
- The US Dollar trades a touch softer on Monday with US traders enjoying the long weekend.
- Markets are digesting geopolitical headlines out of Gaza and the broader Middle East.
- The US Dollar Index tests 104 again and could slide below with the US session no present.
The US Dollar (USD) is digesting some geopolitical news that came out over the weekend and this Monday with tension being pushed back on high alert on Gaza and the Middle East. Israel has released an ultimatum for Hamas to give up the last hostages, otherwise a big military operation will take place before the Shabbat on March 8. Iran meanwhile reported that the attacks last week on one of its major Gas pipelines is the work of Israel, the New York Times reported.
On the economic data front, there are no numbers from the US and no US Federal Reserve speakers either. Fast forward to later this week and on Wednesday traders will move the markets on the publication of the US Fed’s most recent Minutes. Add Thursday with important US Purchase Manager Indices prints and although overall the calendar looks light, there could be some substantial movements later this week in the US Dollar Index.
Daily digest market movers: Calm start and sit on your hands
- The New York Times reported that Iran has proof that Israel has blown up one of Iran’s most key Gas pipelines last week.
- Yemen’s Houthis have targeted a ship in the Gulf of Aden.
- Europe is kicking off its EU election campaign with Ursula von der Leyen announcing she would like to run for a second term.
- The European Commission has slammed Apple with a fine over its Music Streaming business. The claim is allegedly Apple is breaking EU law over access to its music streaming services. The fine could amount to 500 million Euro.
- Equities are welcoming back China which is opening up again after its week-long close due to Chinese New Year. Markets are looking for direction this Monday with a very mixed view and no real outliers to report. US equity futures are trading, though with limited volumes and no opening bell ahead.
- The CME Group’s FedWatch Tool is now looking at the March 20th meeting. Expectations for a pause are 89.5%, while 10.5% for a rate cut.
- The benchmark 10-year US Treasury Note trades will not be moving this Monday with the US markets closed. The close on Friday was at 4.28%.
US Dollar Index Technical Analysis: Do not expect pots to be broken
The US Dollar Index (DXY) is holding its ground above 104 in a very calm start of the week. With US traders not present in the markets, expect very thin volumes to occur, on a Monday where volumes are often already rather on the low side compared to the rest of the week. Rather look for the middle of this week for things to finally come alive, while traders look for clues on the timing of that first rate cut, which is now hanging between June and July.
Should the US Dollar jump to 105.00 on Friday, 105.12 is a key level to keep an eye on. One step beyond there comes 105.88, the high of November 2023. Ultimately, 107.20 – the high of 2023 – could even come back into scope, but that would be when several inflation measures are coming in higher than expected for several weeks in a row.
The 100-day Simple Moving Average looks to be holding for now, though pressure is building on it to snap, near 104.18, so the 200-day SMA near 103.70 looks more solid. Should that give way, look for support from the 55-day SMA near 103.14.
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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