The US Dollar (USD) gained traction during the American session, with the Dollar Index (DXY) trading at 102.45 after an initial dip to 102.20. That trend was primarily driven by favorable ADP Employment Change for December and Initial Jobless Claims figures, which added traction to the Greenback's daily movements.
With the Fed's recent judgment over the easing of inflation, there's a perception of a dovish stance as officials anticipated no rate hikes in 2024 with a possible easing of 75 bps. Current market bets suggest that investors are seeing higher odds of cuts in March and May, but those bets eased somewhat in the last sessions, which gave the US Dollar traction. Upcoming December labor market reports could shift expectations.
The indicators on the daily chart reflect that DXY bulls are gaining ground. The positive slope and positive territory positioning of the Relative Strength Index (RSI) suggest that buying momentum is prevailing. Further backing this is the Moving Average Convergence Divergence (MACD) showing green bars on the rise, which further underscores the growing strength in the buyers' camp.
In contrast, the index's positioning with regard to the Simple Moving Averages (SMAs) offers a mixed outlook. The index stays above the 20-day SMA, highlighting the short-term buying momentum, but it is still below both the 100 and 200-day SMAs. This indicates that bears are trying to maintain a foothold in larger time frames. Still, their hold appears to be weakening, especially in the short term.
Therefore, while the long-term trend might favor bears, the short-term analysis indicates stronger upside momentum steered by the bullish camp — with both the RSI and MACD affirming this assertion.
Support levels: 102.20 (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.