US Dollar rally loses momentum as Fed data-driven thesis is set for another test
- The US Dollar retreats a touch on Monday after failing to break Friday's high.
- Traders are looking forward to a very choppy trading week, with a bank holiday on Friday.
- The US Dollar Index steadies in the mid-104.00 range ahead of GDP and PCE data.
The US Dollar (USD) is facing a “pop quiz” moment before traders can enjoy a bank holiday this week, with many trading desks and markets across the globe closed on Good Friday. Traders will likely continue to speculate on whether the Fed’s thesis of three cuts for this year is still valid, with a few interesting leading economic indicators and US Gross Domestic Product (GDP) numbers at hand. As if that is not enough, on Good Friday (with thin liquidity and most markets closed), the US will release the Fed’s preferred inflation gauge: the Personal Consumption Expenditures (PCE) Price Index for February.
On the economic data front, Monday offers a soft opening for the trading week with only US New Home Sales as the data point to trade on. Three US Federal Reserve members are due to make an appearance: Lisa Cook, who is a member of the Board of Governors at the Fed, Chicago Fed President Austan Goolsbee and Atlanta Fed Raphael Bostic. In the bond market, the US Treasury will be very active with three bond auctions taking place this Monday.
Daily digest market movers: Asia has a hangover
- The People’s Bank of China (PBoC) fixed its Yuan substantially stronger against the US Dollar, triggering a lower USD/CNH, which, in a domino effect, puts the Greenback on the backfoot.
- The release of Minutes from the latest Bank of Japan meeting saw equities in Japan plunge as the documents signalled that the BoJ is considering to hike interest rates more than what markets were expecting.
- This Monday kicks off with New Home Sales data for February at 14:00 GMT. In January, sales rose by 1.5%.
- Three Fed speakers on the docket for this Monday:
- Atlanta Fed President Raphael Bostic will speak at 12:25 GMT.
- Chicago Fed President Austan Goolsbee will speak around 13:05 GMT.
- US Fed Board member Lisa Cook will speak around 14:30 GMT.
- The US Treasury is set to allocate three fresh bond issuances this Monday:
- A 3-month and a 6-month bill near 15:30 GMT.
- A 2-year note is expected to be placed at 17:00 GMT.
- Equities are falling sharply on Monday. Asia indices are down, led by Japan’s Nikkei, which closed off at more than 1% in the red ¡. Europe is following suit, with a negative opening for both the Stoxx 50 and the German Dax, while US Futures are roughly flat.
- According to the CME Group’s FedWatch Tool, expectations for the Fed’s May 1 meeting are at 89.2% for keeping the fed funds rate unchanged, while chances of a rate cut are at 10.8%.
- The benchmark 10-year US Treasury Note trades around 4.21%, the lower end of this week.
US Dollar Index Technical Analysis: Who is right and who is wrong?
The US Dollar Index (DXY) is trading broadly steady above 104.00. However, some easing could be in the cards this week as the Greenback looks for that equilibrium between the dovish Fed and the rather challenging markets on that possible outcome. The truth will probably be somewhere in the middle, which means the DXY could retreat a few points to challenge 104.00 and snap below this barrier by the end of the week.
The DXY is still eyeballing that pivotal level near 104.60, where last week’s rally peaked out. Further up, 104.96 remains the first level in sight. Once above there, the peak at 104.97 from February comes into play ahead of the 105.00 region, with 105.12 as the first resistance.
Support from the 200-day Simple Moving Average (SMA) at 103.72, the 100-day SMA at 103.50, and the 55-day SMA at 103.61 are getting a fresh chance to show their importance. The 103.00 big figure looks to remain unchallenged for now after the decline from the Fed meeting last week got turned around way before reaching it.
US Dollar FAQs
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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