US Dollar retreats following Powell remarks,US ISM PMIs

02 Dec 2023, 02:24 · Views 56

The DXY Index is seen with mild losses around 103.25, after reaching a high of 103.70, above the 200-day SMA.
Fed Chair Powell warned that the bank will hike again if needed, keeping its data-dependency approach.
The US ISM Manufacturing PMI declined in November, as expected.

The US Dollar (USD) Index has shown a modest decline, trading at 103.25, despite Federal Reserve Chair Jerome Powell's hawkish stance. The November ISM Manufacturing PMI came in lower than expected but didn’t trigger any significant downward movements in the Greenback. What seems to weaken the currency is that markets aren’t buying Powell’s hawkishness.

In line with that, despite cooling inflation and a mixed trend in the United States labour market, the Fed turned surprisingly less dovish, maintaining an open stance toward further policy tightening. While important gauges of inflation like the Consumer Price Index (CPI) and Personal Consumption Expenditures (PCE) have trended lower, the bank has declared that it needs to see more evidence of inflation cooling down, leaving the door open for further tightening if needed.

Daily Market Movers: US Dollar with mild losses despite Powell warning markets

Chair Powell noted that in a speech at Spelman College on Friday that it is “premature” to say monetary policy is restrictive enough and that the bank will raise rates again if needed to lower inflation.
On the data front, the ISM Manufacturing PMI reported by the Institute for Supply Management marked 46.7 for November, on par with the previous figure while falling short of the anticipated 47.6.
Looking ahead, a few key events are scheduled with implications for the US Dollar and expectations on the Fed next week, including Retail Sales data for November on Thursday, followed by the November Nonfarm Payrolls report on Friday.
US bond yields are experiencing a downward trend with the 2-year, 5-year and 10-year yields standing at 4.57%, 4.16%, and 4.25%, respectively, and seem to limit the upside for the USD.
According to the CME FedWatch Tool, market expectations for the December meeting indicate investors do not expect a rate hike. Additionally, swap markets are pricing in rate cuts midway through 2024.

Technical Analysis: US Dollar selling momentum persists, DXY capped by the 200-day SMA

The indicators on the daily chart paint a bearish picture of the US dollar. The Relative Strength Index (RSI) position underscores strong selling momentum, while the negative skew in the Moving Average Convergence Divergence (MACD) histogram further validates this downward pressure.

Bolstering the bearish case, the DXY position in relation to the Simple Moving Averages (SMAs) reinforces the downward trajectory. With the DXY remaining below the 20, 100 and 200-day SMAs, it's apparent that buyers are facing an uphill battle against a prevailing bearish trend.

Support levels: 103.15, 103.00, 102.90.
Resistance levels: 103.60 (200-day SMA), 104.00, 104.20 (100-day SMA)

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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