The US Dollar (USD) is caught in an upbeat mood with the DXY Index trading at 103.50. The gains are buoyed by strong housing and labor data and negative market sentiment. Tensions in the Middle East and the weakening of the Chinese stock market seem to be driving demand for the Greenback
The US economy appears overheated, tempering the market's dovish expectations, although the chances of interest rate cuts in March and May lingers at around 50%. Thus, the US dollar remains in fluctuating currents, affected by both resilient economic performance and dovish bets on the Fed's likely moves.
The technical situation in the daily chart reflects a mixed stance between bullish and bearish momentum. The positive slope and positive territory position of the Relative Strength Index (RSI) signifies that buying momentum is gradually building. This is an indication that market participants are getting more bullish over time.
Moreover, the rising green bars of the Moving Average Convergence Divergence (MACD) affirm the increase in buying pressure. On a broader scale, the position of the asset with respect to its Simple Moving Averages (SMAs) gives a mixed picture. The pair is located above the 20 and 100-day SMAs, indicating consistent buying pressure in the short to medium-term. However, the DXY trades below the 200-day SMA, which suggests a bearish bias on a long-term perspective.
Interestingly, despite the recent bearish movements, the fact that bulls are holding their ground and continue to exhibit strength implies that the buying force currently has the upper hand in the market.
Support levels: 103.40 (100-day SMA), 103.00, 102.80, 102.50.
Resistance levels: 103.60, 103.80, 104.00.
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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