US Dollar sees gains as US traders return and yields climb
- The DXY Index rose near 103.40 but was rejected by the 100-day SMA.
- Rising US yields made the US Dollar gain interest.
- Dovish bets on the Fed remain high.
The US Dollar (USD) started the trading session by surging to the 103.40 mark, quickly being pulled back by the resistance of the 100-day SMA. This swift rebound was primarily due to US traders returning from their holiday, further catalyzed by a progressive rise in yields.
The markets are anticipating that the Fed’s easing cycle will begin in March, followed by another rate cut in May, which may limit any upside for the US Dollar. Despite higher CPI numbers, the market remains stubborn and expects the Fed to initiate its easing cycle sooner rather than later, and the soft PPI readings gave markets a reason to bet on a less aggressive approach.
Daily digest market movers: US Dollar finds strength as US traders return, bond yields rise
- No significant reports were released during the session.
- US bond yields are edging higher, with the 2-year yield at 4.20%, the 5-year yield at 3.90% and the 10-year yield at around 4%.
- Forward-looking markets anticipate that for the upcoming January meeting, the CME FedWatch Tool points toward no hike, with low probabilities of a rate cut. Additionally, markets are now pricing in higher odds of rate cuts in March and May 2024.
- This week, the US will release Retail Sales figures from December and the Fed’s Beige Book, which may have an impact on those expectations.
Technical Analysis: DXY gets additional ground must regain the 100-day SMA to confirm a reversal
The Relative Strength Index (RSI), showcasing a positive slope in positive territory, points toward increasing bullish momentum. The Moving Average Convergence Divergence (MACD) affirms this trend with rising green bars, suggesting a build-up of buying pressure. The ongoing bullish control is further emphasized by the asset standing above the 20-day Simple Moving Average (SMA) - a sign of short-term strength.
On the contrary, the index's position below the 100-day and 200-day Simple Moving Averages (SMAs) portrays an overarching bearish stance. This position indicates that despite short-term bullish advances, sellers still hold a broader market control and that buyers must regain the 100-day average to start considering the upward movements a reversal.
Support levels: 103.00, 102.80, 102.50.
Resistance levels: 103.40 (100-day SMA), 103.60, 103.80.
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.
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