The US Dollar (USD) was able to avoid a meltdown on Monday by closing marginally in the green, avoiding a possible technical rejection in the US Dollar Index (DXY). Meanwhile, this Tuesday the Greenback is back in favor after Chinese import numbers plunged even worse than during the pandemic. This triggers some risk aversion flow with the US Dollar as safe haven and US bonds being bid.
On the economic front, a chunky calendar includes the National Federation of Independent Business Optimism Index (NFIB) and the TechnoMetrica Institute of Policy & Politics Economic Optimism Index (TIPP). Add to that US Federal Reserve (Fed) speakers Patrick Harker of the Reserve Bank of Philadelphia and Thomas Barkin from Richmond, and traders will have a dry-run for the US Consumer Price Index (CPI) numbers later this week.On Monday, the Fed’s John Williams said that cuts will come next year.
The US Dollar is back in the green after avoiding a technical meltdown, which could have gotten ugly based on the technical analysis from the US Dollar Index (DXY) on Monday. US Dollar bulls were trying to break above the 100-day Simple Moving Average around 102.30 but got rejected and saw all their gains evaporate for the day at the US opening bell. This Tuesday, the safe haven inflow puts the DXY back up above 102.30 with the possibility to get across the 55-day SMA at 102.48.
For the upside, 102.31 remains a key level to watch in the form of the 100-day Simple Moving Average (SMA) and needs to see a daily close above in order to be turned into support going forward. Even should the DXY be able to break and close above there, US Dollar bulls are not out of the woods yet, with the 55-day SMA just above there at 102.48. Two key levels need to be broken and closed above in order to avoid any large pullbacks before targeting 103 to the upside.
On the downside, the US Dollar bears will defend that same mentioned 100-day SMA at 102.31 and try to stage a firm rejection as nearly happened on Monday. The uptrend from mid-July will be broken once bears can pull the price action below 101.74, which is the low of this past Friday. Once that unfolds, the probability of the DXY collapsing all the way back to sub-100 is quite large.
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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