The US Dollar (USD) Index trades with noteworthy gains at 102.60, having successfully reclaimed the 20-day Simple Moving Average (SMA). This comes after the dovish bets on the Federal Reserve (Fed) eased somewhat following the release of the Institute Supply Management (ISM) Manufacturing PMI for December and the JOLTs Job Openings data for November. At 19:00 GMT, the Fed will release the minutes from its December meeting.
The Fed's dovish stance in its last 2023 meeting, welcoming cooling inflation and dismissing rate hikes in 2024, was positively received by markets that dumped the US Dollar in the last session. However, despite investors anticipating high odds of rate cuts in March and May 2023, incoming data could modify these expectations and focus shifts to December labor reports.
The Relative Strength Index (RSI), with its position in positive territory and positive slope, indicates a strengthening buying momentum in the DXY, showing that buyers may continue pushing up the currency index price. This is reinforced by the rising green bars of the Moving Average Convergence Divergence (MACD), which suggest a shift towards bullish territory.
However, the picture isn't entirely optimistic, as seen in the Simple Moving Averages (SMAs). The index's position above the 20-day SMA underscores the short-term buying momentum, but its position below the 100 and 200-day SMAs serves as a reminder of the sustained selling strength that continues to prevail on broader time frames. This suggests a bearish undercurrent that may need to gain more momentum before the situation could tip in favor of sellers.
Support levels: 102.40 (20-day SMA),102.00, 101.50.
Resistance levels: 102.70, 102.90, 103.00.
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.