US Dollar trades higher after strong GDP data
- The DXY Index sees gains, trades slightly below the 100-day SMA.
- Consumer Spending remained steady in Q4, while GDP grew at a faster rate than expected.
- Markets continue to adjust their expectations.
The US Dollar (USD) DXY index has traded at 103.55 on Thursday, representing 0.30% gains following the release of key economic activity as the case of nearer-term rate cuts by the Federal Reserve (Fed) continues to lose relevance.
The US economy yet again demonstrates resilience as shown in the strong Q4 GDP growth of 3.3%. The Federal Reserve's aggressive hikes have succeeded in moderating inflation without causing significant economic pain. Despite indicators of slowing economic momentum, such as lower household saving rates and declining job openings, the overall robust output has boosted market confidence.
Daily Digest Market Movers: US Dollar finds a lift following strong Q4 GDP figures
- The Real Gross Domestic Product (GDP), released quarterly by the US Bureau of Economic Analysis, grew in Q4 at an annualized rate of 3.3%, surpassing the expected 2% but below the previous quarter’s reading of 4.9%.
- Personal Consumption Expenditures (PCE) (QoQ) came in at 1.7% matching expectations as well as the core measure, which printed at 2%.
- For the Federal Reserve (Fed), these economic activity figures may present a threat to their battle against inflation, which could make them delay the start of the easing cycle.
- The CME FedWatch Tool shows 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%.
Technical Analysis: DXY bulls step in and regain the 200-day SMA
The indicators on the daily chart are reflecting a relatively neutral stance with a slight bullish bias. The Relative Strength Index (RSI) is showing a positive slope in positive territory. This typically signals upward momentum, indicating that buying pressure is currently stronger.
The Moving Average Convergence Divergence (MACD) indicator is exhibiting flat, green bars, suggesting that the previous upward momentum is pausing but that buyers are still present in the market. Typically, a flat MACD in positive territory is often seen as a consolidation phase before the next upward move.
Looking at the Simple Moving Averages (SMAs), the pair is holding above the 20-day and 200-day SMAs while staying below the 100-day SMA. This demonstrates a mixed picture, but the positioning above the major 200-day SMA emphasizes the long-term bullish bias, indicating the bulls are still holding some dominance.
Support Levels: 103.50 (200-day SMA), 103.00, 102.80, 102.60 (20-day SMA).
Resistance Levels: 103.70, 103.90, 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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