The US Dollar (USD) Index soared on Monday, trading at 103.75 with gains hitting highs unseen since mid-December. This surge comes ahead of what is anticipated to be an eventful week with the first Federal Reserve (Fed) decision of 2024 on Wednesday and key labor market figures from the US on Friday.
In that sense, market expectations hint at a possible rate cut by the Fed in March. However, if economic growth sustains itself, a March rate cut seems unlikely. This is why bets have continued to shift toward the easing cycle beginning in May. In case the US continues to show resilience and markets delay expectations of the cuts, the downside is limited for the short term. The Fed’s tone on Wednesday will be key for the markets to continue placing their bets on the rate cuts calendar in 2024, so the USD may face volatility.
The indicators on the daily chart are reflecting the revival of buying momentum. The positive slope in positive territory of the Relative Strength Index (RSI) indicate that bulls are attaining more strength. This recovery can also be observed in the rising green bars of the Moving Average Convergence Divergence (MACD), alluding to more substantial bullish influence.
Located above the 20-day Simple Moving Average (SMA), the Index shows the immediate market trend is favoring buyers. The positioning below the 100-day SMA, however, indicates a medium-term bearish bias. But an important development is the position above the long-term 200-day SMA, which suggests that the dominant trend is still bullish.
Consequently, the current technical environment indicates that while bears had been momentarily in control, DXY buyers are currently on the runway to reclaim dominance. The overall trend still seems to lean toward the bullish side.
Support Levels: 103.50 (200-day SMA),103.30, 103.00.
Resistance Levels: 103.90,104.00,104.20.
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.
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.
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.
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.