Market news
26.05.2023, 10:03

US Dollar steady as traders await PCE inflation, Durable Goods data

  • US Dollar stabilizes after big rally, awaits next market-moving event.. 
  • US debt-ceiling talks continue into Friday, Biden mentions possible spending freeze and denies default.. 
  • US Dollar Index holds just above 104 and awaits US macroeconomic data for a sense of direction. 

The US Dollar (USD) is in wait-and-see mode early on Friday as traders await more economic data out of the US to assess which way to take. The US debt ceiling keeps making headlines, with more details being released about a possible deal, although an agreement this week looks almost close to impossible. US President Joe Biden gave more details about the talks and reiterated that there will be no default on his watch. 

On the macroeconomic data front, a big slew of important data is about to hit the markets. At 12:30 GMT, the Fed’s preferred inflation metric is being published – the Personal Consumption Expenditure (PCE) inflation numbers, both core and overall for monthly and yearly performances. These numbers have the potential to shift market expectations for the next Federal Reserve interest rate decision in June, thus being an important market-mover for US Dollar traders. 

Personal Spending and Income figures, together with Durable Goods Orders and Inventories data, will be hitting the wires at that same time. To close off the batch of macroeconomic data for the US, the University of Michigan is set to issue its May Final reading for Consumer Sentiment and Inflation Expectations. These numbers could help round-up moves on US Dollar, Treasury yields and other assets. 

Daily digest: US Dollar to be data-driven this Friday

  • US President Joe Biden commented after the last debt-ceiling meeting that a proposal is on the table for a spending freeze for two years, and reiterated again there will be no default. Meanwhile GOP debt negotiators gave ground on defence spending demands. 
  • Negotiator Garret Graves said that finding a debt-limit deal this Friday will be hard. 
  • US Credit Default Swaps (CDS) eases a touch to 163.875 after peaking at 165.83 on Thursday. The peak was last week on Monday at 177.62 when concerns for a default were at the highest. 
  • Fitch places Fannie Mae and Freddie Mac ratings on watch. 
  • US Treasury Cash balance dropped to $49.5 billion on Wednesday. 
  • US equity futures are mixed to unchanged at the start of this Friday, while the Chinese Hang Seng Index closed nearly 2% lower. 
  • The CME Group FedWatch Tool shows that markets are pricing in a 82% chance of rate hike for July and even June is now at a 41% chance for a hike. The data coming out this Friday could lock in that rate hike for July and see a more than 50% chance for the June rate hike. 
  • The benchmark 10-year US Treasury bond yield trades at 3.79% and are holding at that level after briefly hitting 3.82%, awaiting further guidance from the data later this Friday. 

US Dollar Index technical analysis: USD bulls pause their attack

The US Dollar Index (DXY) has taken out both the 55-day and the 100-day Simple Moving Averages (SMA), respectively, at 102.43 and 102.85 on the upside. The US Dollar safe-haven status keeps seeing bids for the DXY, with 104 having been broken early on Thursday and now eases a touch as a debt-ceiling deal takes some shape. 

On the upside, 105.73 (200-day SMA) still acts as long-term price target to hit, as the next upside key level for the US Dollar Index is at 104.00 (psychological, static level), and acts as an intermediary element to cross the open space.

On the downside, 102.85 (100-day SMA) aligns as the first support level to confirm a change of trend. In the case that breaks down, watch how the DXY reacts at the 55-day SMA at 102.48 in order to assess any further downturn or upturn. 

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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