US Dollar clings to five-month highs above 105.00

Source Fxstreet
Apr 11, 2024 10:30
  • The US Dollar trades in the green across the board on Thursday’s European session. 
  • Traders brace for further US data and ECB monetary policy decision as well. 
  • The US Dollar Index consolidates above 105.00 and could set sail for 106.00.

The US Dollar (USD) holds into gains on Thursday after having a field day on Wednesday, trading over 1% in the green, with a move not seen since early January. Finally, the standstill and sideways price action that accounts for 2024 thus far is changing, and volatility could finally pick up. Markets could see outflows from carry trades into the Greenback as the US Dollar is expected to remain steady due to the anticipation that the Federal Reserve (Fed) could keep higher interest rates for longer, while all other major central banks will be cutting them sooner. 

On the economic data front, there are plenty of data points to digest besides the European Central Bank (ECB) meeting later on Thursday. On the docket, the weekly Initial Jobless Claims could add to the current US Dollar strength should they decline or steady. Adding on, the Producer Price Index (PPI) numbers could add more oil to the bonfire as another strong number could signal that inflation pressures persist.  

Daily digest market movers: ECB and PPI as drivers

  • On the geopolitical front, China has sanctioned two US companies for allegedly selling arms to Taiwan, according to Bloomberg.
  • The European Central Bank is set to announce its monetary policy decision on Thursday:
    • At 12:15 GMT, the ECB’s Policy Rate decision will be released, accompanied by a written statement.
    • At 12:45 GMT, ECB President Christine Lagarde will speak and have a Q&A session with reporters. 
  • Around 12:30 GMT, a bulk load of US data will be released:
    • Jobless Claims:
      • Initial Jobless Claims are expected to decline to 215,000 from 221,000 in the week ending on April 5.
      • Continuing Jobless Claims data are for the week ending on March 29. There were 1.791 million claims the week before.
    • The Producer Price Index (PPI) data for March will be released at the same time:
      • Monthly headline PPI is set to decline to 0.3% from 0.6%.
      • Yearly headline PPI is expected to grow at a faster pace of  2.2% from 1.6%.
      • Monthly core PPI is set to increase by 0.2%, slowing from 0.3%.
      • Yearly core PPI is anticipated to increase  by 2.3%, more than the 2.0% seen a month earlier.
  • Federal Reserve Bank of New York President John Williams will deliver some remarks around 12:45 GMT. 
  • Another Fed speaker, Federal Reserve Bank of Atlanta President Raphael Bostic, will speak around 17:10 GMT. 
  • US equity futures are rather flat ahead of the PPI numbers later on Thursday. Traders are digesting if risk on is the way to go as it becomes increasingly likely that  US interest rates will probably remain elevated for longer.
  • After the hotter-than-expected US consumer inflation data released on Wednesday, expectations for a hold in the Fed’s interest rate at the June meeting increased sharply to over 80%, from roughly 40% before the release of the CPI figures.
  • The benchmark 10-year US Treasury Note trades around 4.56%, which is lower ahead of US inflation.

US Dollar Index Technical Analysis: Game-changing moment for 2024

The US Dollar Index (DXY) snaps above 105.00 for the first time this year and sets the bar at a fresh five-month high around 105.32. As the Fed could now keep interest rates steady longer than other major central banks, the rate differentials will start to kick in, seeing ample amounts of more US dollar strength ahead. 

With Wednesday’s seismic move, fresh levels need to be pencilled in for more upside. The first level is the November 10 high at 106.01, just above the 106.00 figure. Further up and above the 107.00 round level, the DXY Index could meet resistance at 107.35, the October 3 high.. 

On the downside, fresh support levels need to be pencilled in as well, with the first important level at the 105.00 big figure, which can see the DXY Index orbiting around it, snapping back below and above it, for a brief amount of time. Further down, 104.60 should also act as a support, ahead of the region with both the 55-day and the 200-day Simple Moving Averages at 103.97 and 103.84, respectively.

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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