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- US Dollar continues to weaken on dovish Fed bets, quiet week ahead
US Dollar continues to weaken on dovish Fed bets, quiet week ahead
- The DXY Index fell to its lowest level since July, below 101.00.
- Markets are placing bets on six rate cuts by the Federal Reserve for 2024.
- As for now, investors are pricing in the first cut in March.
The US Dollar (USD) continues to experience sharp losses, with the US Dollar Index (DXY) trading at 100.95 its lowest level in five months. This downturn has been largely driven by dovish bets taking precedence following the release of soft US Personal Consumption Expenditures (PCE) Price Index figures last week.
In the last meeting of 2023, the Federal Reserve showcased a dovish stance, welcoming tame inflation figures and ruling out a 2024 rate hike, favoring 75 bps of easing instead. Market anticipations for March and May rate cuts further underscore this position. The prospects of monetary easing by the Fed typically weaken the US Dollar, as reduced interest rates make dollar-denominated assets less attractive, leading investors to seek higher yields elsewhere. Moreover, the release of soft US PCE Price Index figures exacerbated those bets as cooling inflation favors the case for a sooner-than-expected start of the easing cycle.
Daily digest market movers: US Dollar Index retreats amid dovish market expectations, lower bond yields weigh
- The US Core Personal Consumption Expenditures (PCE) Price Index in November was reported to have increased by 3.2% year-over-year, slightly below market expectations of 3.3%.
- According to the CME FedWatch Tool, markets are predicting a rate hold for the upcoming January Federal Reserve meeting, and it shows a low probability of 15% for a rate cut. For the March and May 2024 meetings, markets are pricing in rate cuts.
- Overall, markets are pricing in 160 bps of easing in 2024 vs the median of the Federal Open Market Committee (FOMC) of 75 bps.
- No relevant reports are due in the last week of 2023. Markets will keep an eye on Thursday’s weekly US Jobless Claims.
Technical Analysis: DXY Index selling pressure persists, an upward correction is likely
The indicators on the daily chart reflect a dominant selling pressure on the US Dollar Index. The Relative Strength Index (RSI) is currently in oversold levels, which, from a contrarian perspective, signals a potential upcoming correction. The Moving Average Convergence Divergence (MACD) displays rising red bars, usually an indication of significant bearish momentum.
On a broader scale, the index is positioned below the 20, 100, and 200-day Simple Moving Averages (SMAs), a strong testament to the persistent bearish control in the market. In the face of these indicators, buyers need to significantly step up their endeavors for a bullish reversal to occur.
Support levels: 100.80, 100.50, 100.30.
Resistance levels: 101.00, 101.30, 101.50.
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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