The US Dollar (USD) is currently trading at the 102.15 area, seeing losses due to bulls struggling to sustain the momentum gained last week. Monday’s calendar has nothing relevant to offer, and the focus is set on the Consumer Price Index (CPI) figures from December, due on Wednesday.
In its last 2023 meeting, the Federal Reserve (Fed) mirrored a dovish stance, welcoming moderating inflation and projecting no rate hikes in 2024 alongside a forecasted 75 bps of easing. Current market expectations predict a March rate cut and another in May, hinging on December's CPI report. This dovish posture, coupled with anticipation of impending rate cuts, contributes to a weaker US dollar as lower interest rates decrease foreign investment appeal.
The indicators on the daily chart reflect a bearish outlook for the USD. The Relative Strength Index (RSI) is currently demonstrating a negative slope in negative territory, which is backed by the bearish sentiment indicated by the Simple Moving Averages (SMAs) and the Moving Average Convergence Divergence (MACD) indicator’s rising red bars.
The index's position above the 20-day SMA while below the 100 and 200-day SMAs indicates that buying pressure is losing momentum to selling pressure in the medium and long-term time frames. This is a signal that the bears are maintaining some dominance.
Support levels: 102.10,102.00,101.80.
Resistance levels: 102.30,102.50, 102.70.
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.