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    US Dollar trades lower despite strong S&P PMIs

    Source Fxstreet
    January 24, 2024 18:01
    • US Dollar trades lower despite strong S&P PMIs
    • The DXY Index took a downturn toward 103.05, below the 200-day SMA.
    • US January S&P PMIs came in better than expected.
    • All eyes are on Thursday’s PCE figures from December.

    The US Dollar (USD), as expressed by the DXY Index, faced downward pressure falling towards 103.05. However, the USD’s losses may be capped by the report of strong economic activity figures, which may push investors to delay their rate cut expectations. Personal Consumption Expenditures (PCE) figures on Thursday will dictate the pace of the short term.

    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 loses traction as markets digest S&P PMIs

    • The S&P Global Composite PMI released by S&P Global has posted 52.3 for January, surpassing the previous figure of 50.9.
    • The Manufacturing PMI stood at 50.3 for January, reported by S&P Global, surpassing the previous and consensus figure of 47.9, indicating a solid growth in manufacturing activities.
    • The Services PMI significantly beat the previous figure of 51.4 and consensus of 51 to settle at 52.9, highlighting a robust expansion in the services sector.
    • For the Federal Reserve (Fed) these figures may present a threat to their battle against inflation, which could make them delay the start of the easing cycle.
    • Projections from the CME FedWatch Tool show that the market's expectations for the start of the easing cycle have shifted to May as the odds of a cut in March now stands near 42%.
    • Those odds may change after the US releases December’s Personal Consumption Expenditures (PCE) figures, the Fed’s preferred gauge of inflation, on Thursday.

    Technical Analysis: DXY bulls struggle to hold ground as bears takes center stage

    The indicators on the daily chart are reflecting moving dynamics. A downturn can be seen in the Relative Strength Index (RSI), Despite being in positive territory, the negative slope indicates that the buying momentum has been losing strength. 

    The Moving Average Convergence Divergence (MACD) also aligns with this outlook. The decreasing green bars on the MACD histogram highlight the weakening of bullish momentum. 

    Looking at the Simple Moving Averages (SMAs), the index is straddling a key transitional area. Its ability to remain above the 20-day SMA suggests that the buyers still dominate the short term. That being said, the index is below the 100 and 200-day SMAs, a clear indication that the longer-term trend still favors the bears. 

    Support Levels: 103.00, 102.80, 102.60 (20-day SMA).
    Resistance Levels: 103.50 (200-day SMA),103.70, 103.90.

     

     

    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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