US Dollar rallies to mid-February highs ahead of PCE data next week
- Investors continue to bet on the easing cycle beginning by June, led by incoming data.
- The Greenback is holding resilient despite the Fed’s somewhat dovish guidance and falling US Treasury yields.
- Next week, the US will release PCE figures from February.
The US Dollar Index (DXY) is currently trading at a robust 104.428, marking the highest level since mid-February. Notably, the ongoing data continues to set expectations for the commencement of the Federal Reserve (Fed) easing cycle, which most agree will kick off in June. The Fed rejected higher inflation results, and Chairman Jerome Powell reassured markets that the bank won't react hastily to two consecutive months of increased inflation figures. In addition, the interest rate projections from 2024 didn’t change.
The US economy is holding resilient with a strong labor market and inflation remaining sticky. Next week, February’s Personal Consumption Expenditures (PCE) will provide additional guidance to markets.
Daily digest market movers: DXY continues rising on quiet Friday
- The resilience of the US Dollar is evident despite market expectations for dovish movements as continuous gains are noted.
- The Fed has reported generally stronger US data with Fed officials erring on the side of caution against easing too furiously or prematurely.
- Jerome Powell was on the wires earlier in the sessions but didn’t provide any highlights. Barr and Bostic will deliver speeches during the American session.
- US Treasury bond yields are declining with the 2-year trading at 4.60%, the 5-year at 4.19%, and the 10-year at 4.21% with all three seeing sharp declines.
DXY technical analysis: DXY stands robustly with consistent buying momentum
The indicators on the daily chart reflect a bullish momentum. The Relative Strength Index (RSI) is on a positive slope, residing in positive territory. This illustration signifies the ongoing strength of buyers, implying the potential for further appreciation in the near term.
Simultaneously, the Moving Average Convergence Divergence (MACD) is showcasing ascending green bars. This increasing bullish divergence advises that upward momentum is augmenting and that the probability of a bullish push is rising.
Examining the broader scale of technical elements, the DXY's positioning above the convergence of its 20, 100 and 200-day Simple Moving Averages (SMAs) near 103.50-103.70 reinforces a bullish bias on larger time frames.
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.
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