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- The DXY Index trades with gains in the latest session.
- Investors eagerly await Nonfarm Payrolls, Average Hourly Earnings, Unemployment Rate from December, and FOMC Minutes disclosures.
- Rising US bond yields gave the US Dollar traction.
The US Dollar (USD) began trading at 102.10, marking a noteworthy rise in the index. This upward movement may be explained by markets awaiting direction, and investors seeking refuge in the USD ahead of key labor market reports to be released this week.
In the last meeting of 2023, the Federal Reserve adopted a dovish stance, remaining optimistic about easing inflation trends and ruling out rate hikes in 2024. Despite an indicative 75 bps easing forecast, future actions may alter with incoming data, such as the imminent December labor reports. Market speculations for March and May anticipate rate cuts and small odds for the easing cycle to start in the upcoming meeting in January, which may limit the USD’s momentum.
Daily Market Movers: US Dollar strengthens on the back of US yields recovering despite weak S&P revisions
- The US dollar experiences a positive trade ahead of the labor market data, demonstrating an upward momentum.
- December’s revisions from the Manufacturing PMI reported by S&P Global came in at 47.9, falling short of the consensus estimate of 48.2, indicating a slowdown in the manufacturing sector.
- This week, the US will report key labor market figures from December, including the Unemployment Rate, Nonfarm Payrolls, and Average Hourly Earnings. Investors are also keenly waiting for the FOMC Minutes this Wednesday from the last meeting from 2023.
- The US bond yields are on the rise, with the 2-year, 5-year, and 10-year yields trading at 4.32%, 3.91%, and 3.94%, respectively.
- As per the CME FedWatch tool, markets have priced in no hike for the upcoming January meeting, with a mere 15% odds for a rate cut. The markets have also forecasted rate cuts for March and May 2024.
Technical Analysis: DXY bear-dominance persists despite hints of possible short-term bullish reversal
The Relative Strength Index (RSI) paints an optimistic picture as it displays a positive slope in negative territory. This suggests an increasing buying momentum as the index may be embarking on a potential reversal after hitting oversold conditions.
The Moving Average Convergence Divergence (MACD) further strengthens this bullish narrative, presenting rising green bars. This indicates the strengthening of upward momentum and a potential continuation of a bullish trend in the short term.
Yet, when glancing at the Simple Moving Averages (SMAs), the index is trading below the 20, 100, and 200-day SMAs. This predominantly reveals the bearish pressure in the market, overriding the short-term bullish signals of the RSI and MACD.
Support levels: 102.00, 102.50, 101.30.
Resistance levels: 102.40 (20-day SMA), 102.50, 102.70.
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.