US Dollar focus shifts to Europe for upcoming ECB meeting

The US Dollar trades flat after an uneventful Federal Reserve interest rate decision.
Fed Chairman Powell did not kneel to President Trump’s pressure.
The US Dollar Index (DXY) stuck at 108.00 and looking for direction.

The US Dollar Index (DXY), which tracks the performance of the US Dollar against six major currencies, trades flat at around 108.00 at the time of writing on Thursday. All eyes shift to the European Central Bank (ECB), where a 25 basis point (bps) interest rate cut is expected. After the rather hawkish pause from the Federal Reserve (Fed), markets want to see if the ECB will comment on the US political scene with Donald Trump back in office.

That is something Fed Chairman Jerome Powell did not do. He refused to comment on any question referring to President Donald Trump. Several traders are even seeing the hawkish hold from the Fed as a message to Trump that the central bank will remain data dependent, not White House dependent. All this is combined with the fourth quarter preliminary US Gross Domestic Product (GDP) release later this Thursday.

Daily digest market movers: US Consumer in focus

Asian markets will remain quiet this week due to the Lunar New Year, which started on Tuesday, with Chinese traders returning to the markets on February 5.
At 13:15 GMT, the European Central Bank will publish its interest rate decision and monetary policy statement.
At 13:30 GMT, the fourth quarter preliminary US Gross Domestic Product will be released:
- Headline GDP is expected to soften to 2.6% from 3.1% in the previous quarter.
- The Personal Consumption Expenditure Prices (PCE) was at 1.5%, with no forecast available.
- The core PCE element is expected to increase by 2.5% from the previous 2.2%.
The US Jobless Claims for the week ending July 24 are due as well at 13:30 GMT, with Initial Claims expected to ease to 220,000, from 223,000 last week. Continuing Claims are set to soften to 1.890 million, from 1.899 million last week.
At 13:45 GMT, ECB Chairman Christine Lagarde will deliver her monetary policy speech and proceed with the usual Q&A round.
Equities are off to a good start this Thursday, ahead of the expected ECB interest rate cut decision. All European indices are in the green with the German Dax reaching a fresh all-time high. US futures are all in the green as well.
The CME FedWatch tool projects an 80.0% chance for no change in the Fed’s policy rate for its next meeting on March 19.
The US 10-year yield is trading around 4.50% and looks to turn softer, flirting with a fresh low for this year, which stands at 4.496%.

US Dollar Index Technical Analysis: A clash to come

The US Dollar Index (DXY) is going nowhere while US yields are eking out more losses. The biggest concern for markets is the pressure from US President Trump over the Fed, with his demand to get rates and its borrowing cost lower. After last night’s Fed decision, things could heat up further as Trump could start to use more and more unconventional tools to influence the Fed, harming its credibility.

The psychological level of 108.00 is still to be recovered on a daily close, which proves to be a hard task. From there, 109.30 (July 14, 2022, high and rising trendline) is next to pare back last week’s losses. Further up, the next upside level to hit before advancing further remains at 110.79 (September 7, 2022, high).

On the downside, the 55-day Simple Moving Average (SMA) at 107.64 and the October 3, 2023, high at 107.35 acts as a double support the DXY price. For now, that looks to be holding, though the Relative Strength Index (RSI) still has some room for the downside. Hence, rather look for 106.52 or even 105.89 as better levels for US Dollar bulls to engage and trigger a reversal.

US Dollar Index: Daily Chart

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.