US Dollar holds above 104.00  despite dovish comments from Fed officials

Source Fxstreet
Apr 9, 2024 11:30
  • The US Dollar stays afloat and sideways after lackluster Monday trading. 
  • The US economic calendar features Business Optimism numbers.     
  • The US Dollar Index stays afloat above 104.00 despite rather dovish-tilted comments from both Fed’s Goolsbee and Kashkari.

The US Dollar (USD) remains afloat after a very lackluster start of the trading week. The Greenback did not move that much on Monday and only eased a touch after Federal Reserve Bank of Minneapolis President Neel Kashkari and Chicago Fed President Austan Goolsbee said the job market is holding up fine, although is less on fire as the recent US Jobs Report would let markets believe. This created a bit of retreat overnight in the Greenback with Bullard even taking it further and saying that three rate cuts is the ‘base case’ for the Fed.

On the economic data front, both the National Federation of Independent Business (NFIB) and the TechnoMetrica Institute of Policy and Politics (TIPP) are set to release their last numbers for Business Optimism, making it a leading indicator. Small businesses’ optimism often stands for the best measure to gauge the state of the US economy and might change the current “no landing” stance that starts to trickle into the markets’ outlook on the US economy. 

Daily digest market movers: Small Business under a microscope

  • Overnight, Minneapolis Fed President Neel Kashkari delivered a small speech where the main key takeaway was that inflation is set to fall and that the labor market is no longer red hot, though still tight, according to Bloomberg. 
  • Chicago Fed President Austan Goolsbee said that the current level of rates would see joblessness rising, Bloomberg reported. 
  • Former St. Louis Fed President James Bullard saidon Bloomberg TV that three rate cuts are the base case for the Fed and that the first rate cut is being justified by data. Bullard isn’t part of the Federal Open Market Committee (FOMC) anymore. 
  • The People’s Bank of China (PBoC) kept its Yuan fixing at 7.0956 overnight while markets are trading it at 7.2450, which is over 2%, increasing the odds of a bigger intervention from the PBoC. 
  • At 10:00 GMT, the NFIB Business Optimism Index for March got published The March number came in at 88.5, coming from 89.4. Expectations was for 90.2.
  • The US Redbook Index is expected to come in around 12:55 GMT, with the previous reading at 5.2%.
  • At 14:00 GMT, TIPP will release its reading on April’s number, with an estimation for April at 44.2 points after the reading of 43.5 in March.
  • The US Treasury is having a 3-year note auction at 17:00 GMT. 
  • Asian equities are trading in the green this Tuesday, nearly up by 1%, while European equities are taking over the positive tone from Asia, though less euphoric as increases are by about less than half a percent. US futures are looking for direction after the minor gains booked on Monday. 
  • According to the CME Group’s FedWatch Tool, expectations for the Fed’s May 1 meeting are at 97.2% for keeping the fed funds rate unchanged, while chances of a rate cut are at 2.8%.
  • The benchmark 10-year US Treasury Note trades around 4.42% after rallying over 20 basis points in just one week. 

US Dollar Index Technical Analysis: Chopping up the joint

The US Dollar Index (DXY) is back at it, testing the nerve of bigger hedge fund and institutional traders, while retail traders are being squeezed and stopped out again. It looks like this push-and-pull is not ending anytime soon until at least one of the major central banks will start to cut. Range trading is the right approach yet again with the US Dollar Index heading sideways and being trapped between 102.00 and 105.00 for another week.

That first pivotal level for the DXY comes in at 104.60, which was broken last week on Wednesday to the downside, though broken up again from below on Friday.  Further up, 105.12 is the key point after the DXY failed to break that level last week. Once above there, 105.88 is the last resistance point before the Relative Strength Index (RSI) will trade in overbought levels. 

Support from the 200-day Simple Moving Average (SMA) at 103.82, the 100-day SMA at 103.43, and the 55-day SMA at 103.90 showed their importance last week on Wednesday. Further down, the 103.00 big figure looks to remain unchallenged for longer with ample support thus standing in the way. 

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.

 

Disclaimer: For information purposes only. Past performance is not indicative of future results.
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