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    US dollar gains traction as negative market mood fuels recovery

    Source Fxstreet
    Jan 9, 2024 18:20
    • The DXY Index trades with gains at 102.50 after dipping to 102.10.
    • Markets turns risk-averse on Tuesday, seeking refuge in the US Dollar.
    • CPI inflation figures from December are the week’s highlight on Thursday.

    The US Dollar (USD) Index trades on an upward trajectory on Tuesday, touching the 102.50 mark and largely buoyed by the prevailing negative market sentiment that is bolstering the demand for the Greenback. Furthermore, investors are keeping a keen eye on the Consumer Price Index (CPI) outcome on Thursday as a potential determinant of the pair's movement for the next sessions.


    For now, markets are betting on five rate cuts in 2024, largely dismissing the Federal Reserve (Fed) forecast of only 75 bps of easing. Strong labor market data from the US economy was largely offset by a weak US ISM PMI print, so December’s CPI reading will play a big role in shaping expectations of the central bank’s easing calendar.

    Daily digest market movers: US dollar rises on  negative market sentiment, eyes on CPI

    • The negative market mood fuels an increase in the demand for the USD as investors turn cautious ahead of CPI figures.
    • The December Consumer Price Index is projected to come in at 3.2% YoY, above the previous 3.1%. The core annual reading, however, is expected at 3.8%, easing from 4% in November.
    • US bond yields exhibit a mixed behavior, with the 2-year yield at 4.38%, the 5-year yield nearly at 4%, and the 10-year yield hovering a little above 4%.
    • The CME FedWatch Tool suggests that the January meeting is expected to maintain rates with low chances of a cut. Markets are now pricing in higher odds of future rate cuts come March and May 2024.

    Technical Analysis: DXY Index bulls make another stride and consolidate above the 20-day SMA

    The Dollar Index’s Relative Strength Index (RSI) is currently on a positive slope in positive territory, hinting at an energized buying momentum. This is further confirmed by the Moving Average Convergence Divergence (MACD) displaying rising green bars, which reinforce the building's bullish momentum. On the daily chart, the indications are that bulls are gradually reclaiming territory. 

    However, turning toward the Simple Moving Averages (SMAs), on a broader scope they provide a slightly contradictory outlook. Though the pair sits consolidated above the 20-day SMA, bolstering the short-term bullish viewpoint, it resides below the 100 and 200-day SMAs. This placement reveals that bears are still in command of the overall trend despite short-term bullishness.

    Support levels: 102.30, 102.00 (20-day SMA), 101.80.
    Resistance levels: 102.70, 102.90, 103.00.

     

    US Dollar FAQs

    What is the US Dollar?

    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.

    How do the decisions of the Federal Reserve impact the US Dollar?

    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.

    What is Quantitative Easing and how does it influence the US Dollar?

    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.

    What is Quantitative Tightening and how does it influence the 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.
    placeholder
    US Dollar trades neutral while the US commemorates Presidents’ DayThe US Dollar (USD) measured by the Dollar Index (DXY) stands neutral around 104.30 with American traders on the sidelines celebrating the US Presidents’ Day and markets digesting the Producer Price Index (PPI) data from last Friday.
    Source  Fxstreet
    The US Dollar (USD) measured by the Dollar Index (DXY) stands neutral around 104.30 with American traders on the sidelines celebrating the US Presidents’ Day and markets digesting the Producer Price Index (PPI) data from last Friday.
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    The S&P 500 has posted a positive return in 13 of the last 15 Presidential Election years – CitiThe road to the White House currently looks like a rematch between President Joe Biden and former President Donald Trump.
    Source  Fxstreet
    The road to the White House currently looks like a rematch between President Joe Biden and former President Donald Trump.
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    USD Index to stay bid in the 104.00 to 104.60 range – INGUS Dollar (USD) holds steady with the USD Index (DXY) moving sideways near 104.00.
    Source  Fxstreet
    US Dollar (USD) holds steady with the USD Index (DXY) moving sideways near 104.00.
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