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- US Dollar retreats for fifth straight day ahead of ECB decision
US Dollar retreats for fifth straight day ahead of ECB decision
- The US Dollar extends losses, depreciating near 1% in one week.
- US Federal Reserve Chairman Jerome Powell triggered the sell-off by confirming that rate cuts will come this year.
- The US Dollar Index snapped substantial support, increasing the selling pressure.
The US Dollar (USD) extends losses on Thursday for a fifth consecutive trading session after downbeat macroeconomic data and increasing expectations of interest-rate cuts by the Federal Reserve (Fed) later this year. On Wednesday, US Fed Chairman Jerome Powell said in his semi-annual testimony before Congress that cuts will be coming this year. Markets sold the Greenback in the idea that the interest rate differential against other currencies will start to close or might even flip as other central banks are expected to take longer to lower rates compared with the Fed. .
On the economic calendar front, some light data is ahead for Thursday, which will probably be overshadowed by the European Central Bank (ECB) meeting and a speech by ECB President Christine Lagarde. The tone and wording of the speech will be vital as the Euro could advance further against the Greenback should the ECB say that it will maintain current rate levels, in contrast with Fed’s Powell confirmation that cuts are coming. The weekly US Jobless Claims data could have a bit of impact, though not much market movements are expected on the back of it. Meanwhile, Fed’s Powell will head to the US Senate for a second day of testimony.
Daily digest market movers: Rate differential moves market again
- The US economic calendar kicks off at 12:30 GMT with the Challenger Job Cuts report for February. The previous number was 82,307.
- The European Central Bank rate decision will take place at 13:15 GMT, and Lagarde’s press conference will start at 13:45 GMT.
- Weekly Jobless Claims are next, at 13:30 GMT:
- Initial Claims are expected to remain stable at 215,000.
- Continuing Claims are expected to fall from 1.905 million to 1.885 million.
- US trade data for January is set to be released as well at 13:30 GMT:
- The Goods and Services Trade deficit is set to widen to $63.5 billion from $62.2 billion.
- The Goods Trade deficit stood at $92.2 billion a month earlier, with no forecast available.
- Unit Labor Costs data for Q4, also due at 13:30 GMT, are seen accelerating slightly from 0.5% to 0.6%. Nonfarm Productivity for Q4 is seen heading from 3.2% to 3.1%.
- US Federal Reserve Chairman Jerome Powell heads back to Capitol Hill for a second day of testimony before Congress. Comments are expected to come in around 15:00 GMT.
- Fed Cleveland President Loretta Mester will speak near 16:30 GMT.
- Equities are in the red after the blurry rate hike communication from the Bank of Japan (BoJ). BoJ members are unable to form a consensus on when to hike, which sees the Yen soaring and in its inverse correlation triggers selling in stock markets. All equity markets are down, from Japan over China and across Europe. Even the US futures are in red territory.
- According to the CME Group’s FedWatch Tool, expectations for a Fed pause in the March 20 meeting are at 95%, while chances of a rate cut stand at 5%.
- The benchmark 10-year US Treasury Note trades around 4.11%, the lowest level in over a week.
US Dollar Index Technical Analysis: Open the flood gates
The US Dollar Index (DXY) is trading at a crucial level, just above 103.00 and near the 55-day Simple Moving Average (SMA) at 103.28. Once that level gives way, it opens the door to a nosedive all the way to 100.00. With the rate differential gap starting to close, the risk is that the gap could flip in favor of other major currencies, which could mean longer-term weakness ahead for the Greenback.
On the upside, there is a long road to recovery for the Greenback, with the first reclaiming ground at the 200-day SMA near 103.73. Once broken through, the 100-day SMA is popping up at 103.85, so a bit of a double cap in that region. Depending on the catalyst that pushes the DXY back further upwards, 104.60 remains the key level on the topside.
It is a bit of an abyss for the DXY where it hangs at the moment, dangling around the 55-day SMA at 103.28. Should it move further away, 103.00 is the first thin line in the sand, though rather look for 101.75, which bears some pivotal relevance. Once through there, the road is open for another leg lower to 100.61, the low of 2023.
US Dollar FAQs
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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