US Dollar finds strength ahead of PCE data, rising yields
- The DXY Index showcases gains, jumping back above the 200-day SMA near 103.70.
- No relevant reports were released on Tuesday, focus is set on PCE and GDP data due later this week.
- Rising yields and markets delaying dovish bets on the Fed provide a boost to the Greenback.
The US Dollar (USD) index has been experiencing an uptrend, with the index currently trading up to the 103.70 level. This comes in anticipation surrounding upcoming key inflation data and the impact of rising yield as markets reduced their dovish bets on the Federal Reserve (Fed).
The US economy is maintaining its robustness as traders await key data and central bank meetings later this week. Despite a lack of major data or any Fed speakers, the market pushed back its easing expectations to roughly 125 bps over 2024, down from nearly 175 bps earlier this month, which has helped the Greenback recover.
Daily Digest Market Movers: US Dollar gains momentum as rising yields drive uptrend amid lacking high-tier reports
- On Thursday, the US will release December Personal Consumption Expenditures (PCE) data, which is expected to show that inflation has stagnated. Gross Domestic Product (GDP) figures from Q4 are also due that day and markets expect the economic activity to have cooled off.
- US bond yields are on the rise, with the 2-year yield at 4.40%, the 5-year yield at 4.06%, and the 10-year yield at 4.15%. All three rates are approaching their highest level in January as investors adjust their expectations on the next Fed decision.
- Projections from the CME FedWatch Tool show that the market's expectations for the start of the easing cycle have shifted to May.
Technical Analysis: DXY index recovers the 200-day SMA as bulls find a lift
The indicators on the daily chart reflect a mix of bullish and bearish sentiments. The Relative Strength Index (RSI) is in positive territory, indicating sustained buying pressure in the market that is underscored by the appreciating slope of the RSI plot.
Simultaneously, the Moving Average Convergence Divergence (MACD) paints a contrasting picture. The MACD histogram displays flat green bars, sporting a lack of bullish conviction. This stagnation of MACD hints at a balance in buying and selling pressures for the moment.
As for the Simple Moving Averages (SMAs), the DXY is trading above the 20-day SMA, indicating that the bulls maintain control in the immediate term. Nevertheless, the bearish undercurrent is evident with the index trading below the 100-day SMA. Yet the medium to long-term optimism remains as the index has recovered the crucial 200-day SMA.
Support levels: 103.50 (200-day SMA), 103.30, 103.00.
Resistance levels: 103.80, 104.00, 104.10.
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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