US Dollar flat at start of another pivotal week in markets

The US Dollar edges lower at the start of the week with all eyes on the Trump-Putin meeting on Tuesday.
US bond markets are set to move on the upcoming Fed meeting on Wednesday.
The US Dollar Index remains stuck in a tight range after US Retail Sales data on Monday.

The US Dollar Index (DXY), which tracks the performance of the US Dollar (USD) against six major currencies, could see an outburst in volatility this week amid geopolitical developments and the Federal Reserve (Fed) meeting. At the time of writing on Monday, the DXY index edges lower and trades near 103.60 after the United States (US) Retail Sales data release for February.

On the geopolitical front, a high-stakes meeting between US President Donald Trump and Russian President Vladimir Putin is scheduled on Tuesday, with the two parties to discuss territory and to divide up certain assets, according to President Trump on Sunday at Airforce One, Bloomberg reported.

The second big development is in German politics, with a vote on a €1 trillion spending package on Tuesday to boost Europe’s weapon industry, which would spill over into the whole European industry. If an agreement and backing can be reached with the Greens, a two-thirds majority would be present to get the plan through the German Bundestag.

On the economic data front, all eyes will be on the Federal Reserve (Fed) and the Federal Open Market Committee (FOMC) on Wednesday, where every voting Fed member will be penciling in their projection of where the central bank’s policy rate will be in the near and medium term. Ahead of the Fed’s rate decision and Fed Chairman Jerome Powell’s speech, US Retail Sales for February saw a dreadful revision while current Retail Sales fell flat.

Daily digest market movers: Retail Sales says Customer is fed up

President Trump said he will speak with Russian President Vladimir Putin on Tuesday as the US presses for an end to fighting in Ukraine, Bloomberg reports. On Sunday, during a flight on Air Force One, President Trump confirmed that the discussion will be about territory and dividing up certain assets, and that there is "a very good chance" for a deal.
At 12:30 GMT, US Retail Sales for February came out:
The monthly figure came in at 0.2%, missing the 0.7% from the previous 0.9% contraction in January. It comes even more painful that the -0.9% got revised down to -1.2%. The yearly number was at 4.2% previously and fell to 3.1% while that 4.2% previously got revised to 3.9%.
At the same time, the NY Empire State Manufacturing Index for March took a beating, contracting by 20, missing the small 1.9 contraction expected, coming from a positive 5.7 in February.
Equities are not impressing, with another sluggish performance on Monday. US futures are all in the red, while European equities are ticking up in the green.
The CME Fedwatch Tool sees a 99.0% chance for no interest rate changes in the upcoming Fed meeting on Wednesday. The chances of a rate cut at the May 7 meeting currently stand at 27.5%.
The US 10-year yield trades around 4.30%, off its near five-month low of 4.10% printed on March 4.

US Dollar Index Technical Analysis: Stuck in a ditch

The US Dollar Index (DXY) is stuck in a range between 103.18 and 103.99. However, seeing the geopolitical risk events and the Fed decision this week, a breakout looks inevitable. Watch out for any false breaks and stick to clear technical levels that make sense, such as the 105.00 round level on the upside and the 101.90 on the downside.

Upside risk is a rejection at 104.00 that could result in more downturn. If bulls can avoid that, look for a large sprint higher towards the 105.00 round level, with the 200-day Simple Moving Average (SMA) at 105.01. Once broken through that zone, a string of pivotal levels, such as 105.53 and 105.89, will present as caps.

On the downside, the 103.00 round level could be considered a bearish target in case US yields roll off again, with even 101.90 not unthinkable if markets further capitulate on their long-term US Dollar holdings.

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.

(This story was corrected on March 17at 12:46GMT to say that the DXY trades near 103.60 after the United States (US) Retail Sales data release for February. not before)