- The DXY Index marks a positive stride, trading with gains of 0.60% near the 103.50 area.
- US PCE figures decelerated but showed no surprise, which gives reasons for the Fed to remain cautious.
- Investors will eye November’s ISM Manufacturing PMI report, which is due on Friday. Chair Powell will be on the wires.
The US Dollar (USD) is trending upward, and the US Dollar Index (DXY) exchanged hands on Thursday at 103.45. This USD strength is largely attributed to the latest US Personal Consumption Expenditures (PCE) inflation figures from the US, which fueled the USD and US yields higher.
Despite cooling inflation and a mixed labor market, Federal Reserve (Fed) officials are not ruling out further policy tightening, hinting at a moderately hawkish stance. This is due to officials balancing the costs of doing too little and doing too much, as economic reports are giving mixed signals or not enough evidence of inflation coming down in the eyes of the Fed.
Daily Market Movers: US Dollar gains momentum as PCE figures warn markets
- The US Dollar maintained a strong trading position on Thursday, favoured by a sour market mood after the US PCE inflation figures and an uptick in yields.
- October’s annual PCE Price Index, reported by the US Bureau of Economic Analysis, came in as expected at 3%, down from the previous rate of 3.4%.
- Also for October, the annual Core PCE Price Index matched consensus expectations at 3.5%, a decrease from the preceding rate of 3.7%.
- The weekly report from the US Department of Labor revealed Initial Jobless Claims for the week ending November 25 stood at 218K, slightly below the predicted 220K but higher than the previous figure of 211K.
- Those figures seem to have lowered the hype on markets and favour the cautious stance of the Fed, which is requesting more evidence on inflation coming down.
- On Friday, the spotlight will be on the release of the Institute for Supply Management’s (ISM) Manufacturing PMI for November. Chair Powell will also deliver a speech.
- US bond yields witnessed a rise, with numbers for 2-year, 5-year and 10-year yields logging in at 4.71%, 4.29%, and 4.34%, respectively.
- In anticipation of the upcoming December meeting, the CME FedWatch Tool signals that markets have practically priced in a no hike. Additionally, markets predict rate cuts in mid-2024.
Technical Analysis: The US dollar gains some traction, but indicators highlight bear dominance
The Relative Strength Index (RSI), Moving Average Convergence Divergence (MACD) histogram, and Simple Moving Averages (SMAs) on the daily chart collectively signal a stronghold of selling momentum. The RSI’s position below the median line indicates a trend leaning toward the sellers despite showing a positive slope. The MACD histogram’s negatives further underline the intact bearish pressures, but its bars flattened, reflecting that bears are taking a breather.
Adding to this, the index is below the 20,100 and 200-day Simple Moving Averages (SMAs), explicit evidence of bears unchallenged strength in the broader scenario.
Support levels: 103.30, 103.15, 103.00.
Resistance levels: 103.60 (200-day SMA), 104.00, 104.20 (100-day SMA)
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.