US Dollar eases slightly after posting four-day winning streak

Source Fxstreet
May 24, 2024 11:30
  • The US Dollar has thrived this week, flirting with a five-day winning streak.
  • Markets favored the US Dollar after jaw-breaking US PMI numbers. 
  • The US Dollar Index trades above 105.00 and could set sail to the 105.50 area.

The US Dollar (USD) trades broadly stable on Friday and looks set to end the week in the green as the US Dollar Index (DXY) fights to log in a five-day winning streak. The USD seems to have fallen back into the graces of the markets as the rate differential is supporting a stronger Greenback against many of its peers. Both the Federal Reserve Minutes and Fed members throughout the week have been vocal on their concerns about inflation and that the initial rate cut will be happening only when all conditions are met. 

The broad US Dollar strength was supported on Thursday by stronger-than-expected Purchasing Managers Indexes (PMIs) for May. The data suggested that US business activity expanded at the fastest pace in just over two years, led by an upturn in the services sector.

On the economic data front, there are two main components that could snap the four-day winning streak for the DXY. First up, the preliminary Durable Goods Orders data for April. Secondly, the University of Michigan Consumer Sentiment and Inflation expectation release for May will deliver the last data point for this week. 

Daily digest market movers: Durable Goods already priced in

  • Durable Goods Orders for April will be released at 12:30 GMT:
    • Orders are set to decline by 0.8% after increasing 2.6% in March.
    • Orders without cars and transportation should increase by a marginal 0.1%, down from the 0.2% advance seen a month earlier.
    • With a softer print already in the consensus backed in, any uptick above the consensus could see some more US Dollar strength. 
  • Around 13:35 GMT, Federal Reserve Governor Christopher Waller will deliver a keynote address at the Reykjavik Economic Conference in Iceland.
  • To round off this Friday, at 14:00 GMT, the University of Michigan will release its recent findings for May:
    • Consumer Sentiment is expected to come in at 67.5,  broadly unchanged from its preliminary reading of 67.4.
    • The 5-year inflation expectations index is also expected to remain unchanged from the mid-month estimate of 3.1%.
  • Equities are in the red this Friday from the Asia-Pacific session to Europe. US futures are flat for the day and looking for direction. 
  • The CME Fedwatch Tool is pricing 98.7% for no change in the policy rate for June. September futures are seeing more action where it is a neck-a-neck race with 53.2% chances for a cut against 46.2% for unchanged. A marginal 0.6% price in a rate hike.
  • The benchmark 10-year US Treasury Note trades around 4.47%, near the high for this week.

US Dollar Index Technical Analysis: Do not think it will be that easy!

The US Dollar Index (DXY) is surging again, nearly erasing all the losses from last week on the back of the disinflationary report. Still, the US Dollar Index is not out of the woods yet. It is still a long way to go to head to 106.00, and several economic data points are starting to retreat from their peak performances. 

Traders will need to ask themselves when the US is no longer exceptional in its economic performance against other countries. Is the Greenback then really earning to be back at 106.00 or higher, with the rate differential against its peer as a single main driver? Food for thought for traders over the weekend. 

On the upside, the DXY Index has broken two technical elements which were keeping price action in check. The first level was the 55-day Simple Moving Average (SMA) at 104.83 and the second was the red descending trend line crossed at 104.79 on Wednesday. From now further up, the following levels to consider are 105.12 and 105.52. 

On the downside, the 100-day SMA around 104.28 is the last man supporting the decline. Once that level snaps, an air pocket is placed between 104.11 and 103.00. Should the US Dollar decline persist, the low of March at 102.35 and the low from December at 100.62 are levels to consider.  

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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