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- US Dollar back under pressure on last trading day of 2023
US Dollar back under pressure on last trading day of 2023
- The DXY index trimmed gains and declined towards 101.20.
- The only highlight during the session was December’s Chicago PMI, which came in lower than expected.
- US Treasury yields remain near multi-month lows.
The US Dollar (USD) remains on a subdued tone on the last trading day of 2023. The US Dollar Index (DXY) is positioned at 101.20, shedding daily gains as dovish bets on the Federal Reserve (Fed) weigh heavily on the Greenback. Soft Chicago PMI figures for December also added pressure to the currency on a quiet Friday.
The Federal Reserve's dovish stance, welcoming cooling inflation figures, ruling out rate hikes in 2024, and forecasting 75 bps of easing recently drove demand out of the US Dollar to riskier assets. As for now, the market is anticipating a rate cut in March with an additional adjustment in May. Next week, the US will release key labor market data, which will help investors place their bets for the next Fed decisions.
Daily digest market movers: US Dollar trades soft as dovish bets and poor December Chicago PMI add pressure
- The Chicago PMI report issued by the Institute for Supply Management of Chicago for December recorded 46.9, falling short of the consensus of 51 and the previous figure of 55.8.
- Next week, the highlights in the US calendar will be December’s Nonfarm Payrolls, Average Hourly Earnings, and the Unemployment Rate.
- Yields on US bonds struggle to advance, holding near multi-month lows. Specifically, the 2-year yield is recorded at 4.25%, while the 5-year and 10-year yields stand at 3.84% and 3.85%, respectively.
- The CME FedWatch Tool indicates a low probability for a rate hike in the January meeting with just 15% odds for a cut. Moreover, market sentiment is leaning towards rate cuts for March and May 2024.
Technical Analysis: DXY index bearish pressure persists despite potential for a minor correction
The indicators on the DXY daily chart reflect a predominantly bearish sentiment. With the index considerably below its 20, 100, and 200-day Simple Moving Averages (SMAs), the bears appear to be in control on the broader scale. This is further emphasized by the Relative Strength Index (RSI) nearing oversold conditions, which aligns with the overall index's bearish outlook.
The Moving Average Convergence Divergence (MACD) showcases rising red bars, demonstrating a slight surge in selling pressure. This might trigger a conservative buying signal for contrarian investors looking to seize an opportunity in this oversold market condition.
In short, the selling momentum seems to dominate, but due to the oversold RSI and rising MACD red bars, a minor upward momentum can be expected.
Support levels: 100.70, 100.50, 100.30.
Resistance levels: 101.30, 101.50, 101.70.
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.
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