US Dollar extends losses ahead of quiet week

21 Nov 2023, 02:28 · Views 45

The DXY Index stands at 103.45 on Monday, down by 0.35% on the session.
The US won’t release high-tier economic reports this week, and the November FOMC Minutes will be the week’s highlight.
US yields slightly recovered from September lows.

At the start of the week, the US Dollar, measured by the DXY index, declined toward 103.45 and saw a 0.35% loss. On Friday, the Greenback closed its worst week since July, tallying a 1.80% weekly loss, driven by the expectations of a less aggressive stance by the
Federal Reserve (Fed) following the release of lighter inflation figures last week.

In line with that, the Consumer Price Index (CPI) in the United States in October decelerated to 3.2% YoY, and the core CPI fell to 4% YoY. In that sense, markets cheered that the softening inflation may influence a less aggressive Fed, and investors are now taking off the table a hike at the December meeting and foreseeing sooner rate cuts in 2024.

Daily Digest Market Movers: US continues to weaken after soft inflation

The US Dollar Index started the week on a weak note, falling by 0.35% to 104.35.
Investors are still digesting last week’s inflation data from October in the US.
The US Bureau of Labor Statistics reported that October's Core Consumer Price Index (CPI) missed the consensus. It came in at 4% YoY vs the expected 4.1% and decelerated from its previous figure of 4.1%.
The headline figure came in at 3.2%YoY, below the consensus of 3.3% and in relation to its last reading of 3.7%.
In addition, the Core Producer Price Index (PPI) from October fell short of expectations. It came in at 2.4% YoY vs the expected 2.7% and declined from its previous reading of 2.7%.
On the other hand, Retail Sales from October came in better than expected, declining by 0.1% MoM vs the expected 0.3% decline.
During the week ending November 11, the number of US Initial Jobless Claims increased to 231,000, surpassing the predicted 220,000.
Industrial Production in the United States fell short of expectations, experiencing a 0.6% MoM decline, higher than the -0.3% expected. It also tallied a YoY decrease of 0.7%.
The combination of softening inflation, decelerating job creation, and signs of weakening economic activity made markets confident that the Fed won’t risk hiking again.
As a reaction, the 2, 5 and 10-year rates declined to their lowest levels since early November and mid-September, adding selling pressure to the US Dollar. On Monday, those rates increased to 4.91%, 4.46% and 4.45%, respectively, which could limit the Greenback’s downside.
In the meantime, according to the CME FedWatch Tool, investors have already priced in a no hike in December and are betting on rate cuts sooner than expected in May 2024. A sizable minority is even betting on a rate cut in March.
The week’s highlights include the Federal Open Market Committee (FOMC) November minutes, October’s Durable Goods Orders on Wednesday, and S&P PMIs from November on Friday.

Technical Analysis: US Dollar bears step in with RSI approaching oversold conditions

According to the daily chart, the DXY Index displays a bearish bias with increasing selling pressure, indicating a shift favouring the bears. The Relative Strength Index (RSI) is getting nearer to oversold conditions, signaling that an upward correction may be incoming, while the Moving Average Convergence (MACD) histogram exhibits larger red bars.

On the broader scale, the index is below the 20, 100 and 200-day Simple Moving Averages (SMAs), suggesting that the buyers are struggling to overcome the overall bearish trend and the bears are still in charge.

Support levels: 103.30, 103.15, 103.00.
Resistance levels: 103.60 (200-day SMA), 104.20 (100-day SMA),104.50.

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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