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    US Dollar flattens as markets test viability of recent rally

    Source Fxstreet
    Jan 18, 2024 12:30
    • The US Dollar trades sideways while some mild risk on takes over. 
    • Traders look forward to the weekly US Jobless Claims data. 
    • The US Dollar Index failed to close above the important technical level of 103.40. 

    The US Dollar (USD) trades directionless on Thursday after rallying on Wednesday, when it nearly closed above the very important technical level of 103.40, which aligned with two moving averages. The US Dollar retreated in the last few hours of the US trading session on Wednesday and saw a daily close below the red line. Going forward, from a pure technical perspective, this means  that the recent US Dollar rally could be short-lived. 

    On the economic front, two main elements are key to look out for besides the housing data, which is unlikely to be market moving: The Philadelphia Fed Manufacturing Survey for January will be crucial to see which way it goes after the recent plunge seen on a similar indicator gauging manufacturing activity in the New York state. A further contraction might trigger a full reversal of the US Dollar strength markets saw this week. 

    The other indicator to look at are weekly Jobless Claims. Markets could fully erase all the gains the Greenback had this week if Initial Jobless Claims jump further. Should Continuing Claims head above the previous number of 1,886,000, then expect a downward move in the US Dollar. 

    Daily digest market movers: Housing data not bearing much interest

    • Thursday’s events kick off with comments from Atlanta Federal Reserve President  Raphael Bostic, who due to speak near 12:30 GMT. 
    • Housing Starts data will be released  at 13:30 GMT, together with Jobless Claims:
      • Monthly Housing Starts for December are seen heading from 1.560 million to 1.426 million. 
      • Monthly Building Permits for December are expected to rise from 1.46 million to 1.48 million. 
      • Initial Jobless Claims are expected to jump from 202,000 to 207,000.
      • Continuing Jobless Claims are seen rising from 1.834 million to 1.845 million. 
      • Philadelphia Fed Manufacturing Survey for January expected to jump from -10.5 to -7.
    • The US Treasury will allocate a 4-week bill and a 10-year TIPS near 16:30 GMT and 18:00 GMT. 
    • Equity markets are trying to break the downbeat tone from this week. Asian indexes closed broadly flat, while European equities are trying to tie up with some small gains. US futures are flat and could still go either way.  
    • The CME Group’s FedWatch Tool shows that markets are pricing in a 97.4% chance that the Federal Reserve will keep interest rates unchanged at its January 31 meeting. Around 2.6% expect the first cut already to take place. The more traders reprice cuts to later this year, a small rate hike expectation might come through in the coming days. 
    • The benchmark 10-year US Treasury Note remains steady at 4.08% while the US Dollar Index has retreated a touch. 

    US Dollar Index Technical Analysis: Bulls playing with fire

    The US Dollar Index (DXY) was unable to perform the best scenario to enter in a possible more lengthy period of Greenback strength. Although the rally could still turn into a longer uptrend, the fact that the DXY was unable to have a daily close above both the 55-day and the 200-day Simple Moving Average (SMA) at 103.40means issues ahead. The bulls can still salvage the situation this Thursday or Friday with still a close above the level, and squeeze out the final bearish elements present, before rallying further in the coming days. 

    The DXY is still trading near the 55-day and the 200-day Simple Moving Averages (SMA) at 103.39 and 103.45. In case the DXY can get through that area again, look for 104.44 as the first resistance level on the upside, in the form of the 100-day SMA. If that gets scattered as well, nothing will hold the DXY from heading to either 105.88 or 107.20, the high of September.  

    Risk of a bull trap is very much a possibility, where US Dollar bulls were caught buying into the Greenback when it broke above both the 55-day and the 200-day SMA in early Wednesday trading. Price action could decline substantially and force US Dollar bulls to sell their position at a loss. This would see the DXY first drop to 102.60, at the ascending trend line from September. Once threading below it, the downturn is open to head to 102.00.

    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.
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