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- US Dollar claws back after Tuesday’s meltdown
US Dollar claws back after Tuesday’s meltdown
- The US Dollar in the green with markets bracing for Fed Minutes.
- Markets are suddenly entertaining a possible rate hike by the Fed in the next three months.
- The US Dollar Index trades back above 104 and is salvaging the weakness from Tuesday.
The US Dollar (USD) is in the green as it recovers earlier losses from Tuesday. The US Dollar Index (DXY) jumped higher, back above 104 after the Wall Street Journal reported a shift in the US Fed futures where suddenly a rate hike has become a possibility. The reason for this repricing is a wage report in the Eurozone from the European Central Bank (ECB) that revealed higher wages are still broad based and will result in more longer-term sticky inflation.
On the economic data front, traders are bracing for the release of the Fed Minutes later this evening. Together with the report of the Wall Street Journal it shows how fragile the market is currently pricing in any possibility whatsoever when it comes to rate policies. Traders will be even more looking for clues in the Minutes on whether the Fed will cut ahead of the summer, over the summer, or will not cut at all and might even hike.
Daily digest market movers: Really? A rate hike?
- An article from the Wall Street Journal’s Marketwatch is pointing to a small possibility of a rate hike in the coming three months. This probability is not seen in the US Chicago Mercantile Exchange Fed fund futures, but is showing up in options tied to the Secured Overnight Financing Rate.
- Around 12:00 GMT, the weekly Mortgage Bankers Applications (MBA) Index will be released. Previous was a contraction of -2.3%.
- Near 13:55 the delayed Redbook Index is due to be released, with the previous number at 2.5%.
- The US Treasury Department is heading back to markets for a 20-year bond auction near 18:00.
- THe US Federal Reserve is due to release the Minutes from its latest meeting, near 19:00.
- Ahead of those Minutes, US Atlanta Fed President Raphael Bostic is due to speak near 13:00, followed by Federal Reserve governor Michelle Bowman around 18:00.
- Equities are very dispersed with China being the biggest winner this Wednesday. Both the Hang Seng and the Shenzhen Index are up over 1% on the day. European equities are dragging lower with the British FTSE100 down near 1%. US equity futures before the US opening bell are trading in the red.
- The CME Group’s FedWatch Tool is now looking at the March 20th meeting. Expectations for a pause are 93.5% and 6.5% for a rate cut.
- The benchmark 10-year US Treasury Note trades around 4.27%, a touch softer than Tuesday when the bond market opened for this week.
US Dollar Index Technical Analysis: Ahead of the Fed
The US Dollar Index (DXY) is clawing back with traders bracing for the Fed Minutes later this evening. An additional element that is underpinning the DXY is that suddenly rumours on a possible rate hike from the Fed in the coming three months are showing up in the possibilities. This would mean a widening of the rate differential between the US Dollar and other currencies, which would mean the DXY could soar to 106 within three months, should that rate hike materialise.
Should the US Dollar jump to 105.00 on the back of the Fed Minutes, 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 getting chopped up again, though the DXY looks to be drawn to it each time it snaps below 104.13 The 200-day SMA near 103.72 looks more solid as a support. Should that give way, look for support from the 55-day SMA near 103.17.
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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