On Wednesday, the US Dollar found momentum after the report of positive weekly Initial Jobless Claims from the US, which flashed further warning among investors regarding further tightening from the Federal Reserve (Fed).
The labor market in the United States is showing signs of resilience, and despite the evidence of inflation, it might make Fed officials consider further tightening, which seems to be spooking investors.
The technical landscape of the DXY daily chart delivers a mix of bullish and bearish signals. The Relative Strength Index (RSI) standing flat near oversold conditions indicates a potential weakening of the selling momentum. This could suggest an imminent reversal, a classic sign that buying pressure could soon resurface. Contrarily, the flat red bars of the Moving Average Convergence Divergence (MACD) hint at a short-term bearish bias, suggesting that sellers might be in control of the immediate market. Yet, it is important to bear in mind that the index’s continuous flat nature could turn either way.
Furthermore, the DXY's position below the 20 and 100-day Simple Moving Averages (SMAs) can be perceived as a bearish signal. However, it currently sits above the 200-day SMA, suggesting that bulls hold the fort on a broader time frame with the underlying trend remaining upward.
Support levels: 103.60 (200-day SMA), 103.30, 103.15.
Resistance levels: 104.00, 104.20 (100-day SMA),104.50.
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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