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- US Dollar looks set for third consecutive day of gains this week
US Dollar looks set for third consecutive day of gains this week
- The US Dollar adds gains for a third consecutive day this week.
- A very light economic calendar is ahead for Wednesday.
- The US Dollar Index traders near 103.00, aiming to close above this key level.
The US Dollar (USD) is holding on to a third day of gains this week after the US Consumer Price Index (CPI) data came in slightly higher than expected, casting doubts over the timing of interest-rate cuts by the Federal Reserve (Fed). After an initial positive move following the release of the CPI data, the Greenback gave up half of its gains on Tuesday as US equities rallied. On Wednesday the DXY US Dollar Index is standing firm and looks set to close above 103.00 if no hiccups occur into the US trading session.
On the economic data front, a very light calendar is ahead, with nothing worth mentioning. A rather political element to mention is that the Primaries on Tuesday gave both current US President Joe Biden and former US President Donald Trump enough votes to secure their presidential nominations. November 5 will thus be a rematch from four years ago.
Daily digest market movers: Calm before the next storm
- Current US President Joe Biden and former US President Donald Trump both secured enough votes on Tuesday to deserve their nomination for their respective parties and are heading to November 5 for the Presidential election.
- Austrian Central Bank Governor Robert Holzmann said on Tuesday that should the European Central Bank (ECB) cut interest rates ahead of the Fed, that would mean substantial risk of an over-devalued Euro, which in its turn, could respark inflation again.
- At 11:00 GMT, the weekly Mortgage Applications number will be released. The previous week saw a jump of 9.7%.
- The US Treasury is set to allocate a 30-year Bond Auction at 17:00 GMT.
- Equities are sideways to lower after Asian indices refused to take over the positive close on Wall Street. Europe is the only green spot on the quote board, with both the German Dax and the European Stoxx 50 seeing mild gains.
- According to the CME Group’s FedWatch Tool, expectations for a Fed pause in the March 20 meeting are at 99%, while chances of a rate cut stand at 1%.
- The benchmark 10-year US Treasury Note trades around 4.15%, broadly higher for the week.
US Dollar Index Technical Analysis: If CPI was unable to do it
The US Dollar Index (DXY) might be posting a third day in the green this week, but traders will not be applauding the move after seeing that the CPI print was rather unable to really move the needle for the DXY. With a firm rejection even ahead of the 55-day Simple Moving Average (SMA), the question now is what will fuel the US Dollar for a multiple-day rally seeing several economic indicators abate further.
On the upside, the first reclaiming ground is at 103.34, the 55-day SMA, and at the 200-day SMA near 103.71. Once broken through, the 100-day SMA is popping up at 103.72, 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 was unable to even test or challenge the 55-day SMA after the CPI print. 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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