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- US Dollar trades soft ahead of economic activity figures from the US
US Dollar trades soft ahead of economic activity figures from the US
- The US Dollar traded soft against its rivals on Monday after gaining more than 1% at the end of last week.
- The US will report September’s Retail Sales figures and the Fed’s Beige book.
- The rising Treasury yield and the escalation of the conflict between Israel and Palestine may limit the downside potential.
The US Dollar (USD) measured by the US Dollar DXY Index trades with nearly 0.30% losses on Monday as investors seem to be taking profits from last week’s gains, which saw the green currency gaining over 1% against its rivals. The US reported low-tier economic activity figures that failed to significantly impact the USD with the Empire State Manufacturing Survey conducted by the Federal Reserve Bank of New York declining but lower than expected. Investor’s focus is on Tuesday’s Retail Sales figures from the US and the Federal Reserve (Fed) Beige book report.
In the United States economic activity shows signs of resilience, and inflation figures revealed that the Consumer Price Index (CPI) slightly accelerated in September. This outlook favors the case of the Fed hiking at least one more time in this year, which is reflected by rising US Treasury yields. Investors seem to be gearing up for an additional 25 basis point hike by year's end.
Daily Digest Market Movers: US Dollar consolidates last week’s gains, focus on economic activity reports
- The US Dollar DXY retreated to 106.35 after rising to 106.80 last Friday.
- The NY Empire State Manufacturing Survey from October came in at -4.6 vs the -7 expected.
- US retail Sales are expected to come in at 0.3% MoM, decelerating from 0.6%.
- US yields continue rising, with the 2, 5 and 10-year rates rising to 5.08% and 4.70%, respectively, with more than 0.50% gains.
- Evidence of strong economic activity may reignite bullish momentum for the USD following last week’s inflation figures, which saw the Consumer and Producer Price Indexes accelerating in September.
- The US reported that the Consumer Price Index (CPI) from the US came in at 3.7% YoY, which was higher than the market consensus of 3.6% and matched the previous monthly figure of 3.7% YoY. On the other hand, the Core measure came in at 4.1% YoY, matching the expectations and decelerating from the previous 4.3% YoY.
- The September US Producer Price Index (PPI) was reported to have risen to 2.2% on Wednesday, which was higher than the expected 1.6%.
Technical analysis: US Dollar Index’s bull must defend the 20-day SMA to continue rising
The US Dollar Index DXY is showing a neutral to bullish outlook for the short term and the buyers are building strong support around the 20-day Simple Moving Average (SMA) at 106.15. As long as the index holds above this level, the positive outlook for the short term is intact.
Supports: 106.15 (20-day SMA), 105.80, 105.50.
Resistances: 106.50, 107.00, 107.30.
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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