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- US Dollar trades flat as Fed starts blackout period
US Dollar trades flat as Fed starts blackout period
- The US Dollar steadies at the opening on Monday.
- All eyes this week will be on the US CPI numbers ahead of the Fed interest-rate decision next week.
- The US Dollar Index trades just below 103.00, with technical risk of more downside to come.
The US Dollar (USD) is starting the week at a slow pace, not really making any waves on Monday. However, the Greenback is set for a very firm data-driven regime this week as there will be no US Federal Reserve (Fed) officials speaking. This is because the Fed’s blackout period has started ahead of the rate decision and Chairman Jerome Powell’s speech next week.
Looking ahead on the economic calendar front, focal points this week are Tuesday, Thursday and Friday.. On the top of the board there is the US Consumer Price Index (CPI), to be released on Tuesday. Any decline in inflation will be enough for markets to bring back forward those heavily anticipated rate cuts from the Fed. Add to that the US Producer Price Index (PPI) numbers and Retail Sales for Thursday, and the Greenback could be trading in a whole other ballpark by Friday.
Daily digest market movers: All will be quiet on the Fed front
- No ceasefire deal was reached over the weekend, which means Muslims in Gaza are entering the Ramadan fasting with little supply.
- Portuguese elections were a surprise with a swing to the right, though a coalition remains unclear. With more European countries facing an election year, a swing to the right could mean more protectionism on the trade front.
- Japanese equity markets took it on the chin on Monday after a revision of Gross Domestic Product (GDP) numbers showed that Japan made it just barely out of recession, casting doubts over an upcoming interest-rate hike..
- The US Treasury Department is having its hands full this Monday with no less than three auctions: Near 15:30 GMT both a 3-month and a 6-month bill will be auctioned. At 17:00 GMT, a longer 3-year note will be placed in the markets.
- Equities are painting a very mixed picture this Monday at the start of the week. All Japanese indices are closing by over 2% in the red, while Chinese equity indices are up over 1%. Europe is not taking over the tone from China, and is trading by a near 0.50% in the red for both the German Dax and the overall Stoxx 50. The US equity futures are near flat or very mild in the red ahead of the US session.
- According to the CME Group’s FedWatch Tool, expectations for a Fed pause in the March 20 meeting are at 96%, while chances of a rate cut stand at 4%.
- The benchmark 10-year US Treasury Note trades around 4.05%, the lowest level in over a week.
US Dollar Index Technical Analysis: Markets to move from one point to the next
The US Dollar Index (DXY) is entering a period when it can trade as the Fed says it acts: data-driven. With Fed speakers silent for over a week, markets will need to settle with data points being released throughout the week. This increases the possibility of whipsaw moves should several data points fall in line with a certain bias, with the DXY pricing already the outcome of the Fed meeting next week. Traders will also look for technical levels to break or hold to assess the situation, making the charts this week even more important.
On the upside, the first reclaiming ground is at 103.29, the 55-day Simple Moving Average (SMA), and at the 200-day SMA near 103.71. Once broken through, the 100-day SMA is popping up at 103.76, so a bit of a double cap in that region. Depending on the catalyst that pushes the DXY upwards, 104.96 remains the key level on the topside.
The DXY is trading a bit in nomad's land, with not really any significant support levels nearby. More downside looks inevitable with 102.00 up next, 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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