US Dollar secures gains, primarily driven by strong Retail Sales and rising yields
- DXY Index rises decisively, trading with gains around 103.50 level above the 100-day SMA.
- US Retail Sales in the last month of 2023 rose higher than expected.
- Markets ease their dovish bets on the Fed for March and May FOMC meetings.
The US Dollar (USD) reached a notable stride, trading at 103.50 while confidently deflecting the pressures of the 100-day SMA. This robust stride has been primarily fueled by the strong US Retail Sales data from December and a notable rise in US Treasury yields, both of which show that markets are adjusting their bets on the Federal Reserve’s (Fed) rate-cutting timeline.
The resilient US economy, evidenced by the latest data, is making adjustments to the market's dovish bets, albeit odds for rate cuts in March and May still hover around 50%. In December, CPI inflation picked up, as well as the job creation pace and wages, while economic activity remains strong, which is making markets believe that the Fed might not consider cutting rates too soon.
Daily Digest Market Movers: US Dollar ascends, bolstered by strong Retail Sales from December
- December's Retail Sales reported by the US Census Bureau outperformed consensus, registering 0.6% growth versus the 0.4% forecast and 0.3% from the previous period.
- The Fed's Beige book report didn't trigger any movements on the Greenback. It stated that the majority of the twelve Federal Reserve districts reported little or no change in economic since the last release.
- An uptick was observed in US bond yields as 2-year, 5-year, and 10-year notes currently trade at 4.30%, 4.02%, and 4.09%, respectively.
- As per the CME FedWatch Tool, the odds of cuts for March and May eased, but they remain high at around 50%.
Technical Analysis: DXY bulls step in and regain the 100-day SMA but now must defend it
The indicators on the daily chart reflect a somewhat bullish bias. The Relative Strength Index (RSI) demonstrates a positive slope in positive territory, endorsing growing buying momentum. The Moving Average Convergence Divergence (MACD) shows rising green bars, indicating the continuance of upward traction in favor of bulls.
The position of the index regarding Simple Moving Averages (SMAs) reveals a mixed picture. The DXY is now positioned above the 20 and 100-day SMAs, an encouraging sight for the buyers. However, it remains below the 200-day SMA, suggesting an undercurrent of bearish sentiment. Despite the recent bearish movements, bulls appear to be gaining ground.
Support levels: 103.40 (100-day SMA), 103.00, 102.80, 102.50.
Resistance levels: 103.60, 103.80, 104.00.
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.
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