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- US Dollar trades with slight losses as investors await fresh drivers
US Dollar trades with slight losses as investors await fresh drivers
- DXY Index registers minor losses, trading around 102.40.
- Investors are on standby awaiting CPI figures to be released on Thursday.
- Lower US yields limit the US Dollar advance.
The US Dollar (USD) observed modest losses on Wednesday, trailing at 102.4 in the US Dollar Index, as market participants stick to the sidelines awaiting drivers. The trading floors were relatively quiet with no significant reports fuelling reactions during the session. The focus is set on the release of the US Consumer Price Index (CPI) from December, due on Thursday.
For now, markets are betting on five rate cuts in 2024, largely dismissing the Federal Reserve (Fed) forecast of only 75 bps of easing. Strong labor market data from the US economy was largely offset by a weak US ISM PMI print, so December’s CPI reading will play a big role in shaping expectations of the central bank’s easing calendar.
Daily digest market movers: US Dollar edges lower on quiet Tuesday, Fed Williams will be on the wires
- The US economy demonstrates continued expansion above trend with Q4 and possibly Q1 growth, bolstered by loose financial conditions.
- The US Dollar remains vulnerable as market easing expectations for the Federal Reserve remain high yet unmet. Fed’s Williams will be on the wires by the end of the American session, which may move markets.
- For Thursday, the December Consumer Price Index is projected to come in at 3.2% YoY, above the previous 3.1%. The core annual reading, however, is expected at 3.8%, easing from 4% in November.
- US bond yields, specifically for the 2, 5 and 10-year bonds, are on a downward trajectory. The yields are seen at 4.35%, 3.96% and 4.02%, which should limit upside for the USD.
- Market anticipations gauged through the CME FedWatch Tool suggest a hold on rates in the upcoming January meeting is priced in. Cuts in interest rates are, however, expected around March and May 2024.
Technical Analysis: DXY bulls are undecided as sellers sit just around the corner
The indicators on the daily chart reflect a decrease in buying momentum and increase in selling pressure. The Relative Strength Index (RSI), which is on a negative slope and in negative territory, suggests that bears are around the corner.
In addition, a decreasing histogram of green bars in the Moving Average Convergence Divergence (MACD) indicator confirms the growing bearish sentiment, indicative of a decrease in bullish momentum. Despite bulls taking a breather, they still are struggling to make a decisive upward move.
This lack of bullish momentum is also confirmed by the position of the index in relation to the Simple Moving Averages (SMAs). While it remains above the 20-day SMA, it is under the broader 100 and 200-day SMAs, suggesting bears are maintaining a bullish grip on the larger time horizon.
Support levels: 102.30, 102.00 (20-day SMA), 101.80.
Resistance levels: 102.70, 102.90, 103.00.
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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