US Dollar drops ball and sees Monday gains being erased
- The US Dollar sticks to its pattern of the past two weeks and remains steady.
- Traders gear up for the week’s first important data point with the US JOLTS release.
- The US Dollar Index is unable to break away from the 200-day SMA and remains stuck in its pattern.
The US Dollar (USD) eats into its Monday’s gains returning the Greenback to where it was on Monday morning. The US Dollar has seen safe haven inflows quickly abate in the US trading session as the US Defense department was quick to downplay any rumours on military interventions or retaliation against Iran or Houthi rebels after three US military personnel got killed in a drone attack on a US base in Jordan. The US Dollar Index could get stuck in a range trade again towards Wednesday for the US Federal Reserve’s first rate decision of 2024.
On the economic front, a perfect appetiser before the main events on Wednesday and Friday comes in the form of the soon-to-be-released US JOLTS Job Openings. Although this is a backward looking index, with the upcoming print covering December, a lower-than-expected number could move the needle. A steep decline in the JOLTS number would point to less demand and less tightness in the job market, which in its turn means a slowdown in the economic activity, as companies would need to pay less to find the proper person for the job, which is again good for lower inflation. Lower inflation means lower rates and a weaker Dollar.
Daily digest market movers: JOLTS warms up the crowd
- Near 13:55 GMT, the US Redbook Index will be released. The previous result was 5.2%.
- At 14:00 Case-Shiller Housing Data will be released to the markets:
- The yearly Home Price Index for November is expected to come out at 5.8% from 4.9% previously.
- The monthly House Price Index for November was at 0.3% for October, with no forecast for November.
- At 15:00 the JOLTS Job Openings for December are to be released. Previous was at 8.79 million and a small decline to 8.75 million is expected. Should this number be substantially lower, that could point to a slowdown in activity and a drop in wages on the horizon, with the balance shifting from more jobs and less jobseekers to more jobseekers and fewer jobs available.
- THe US Consumer Confidence for January to be released at the same time. Previous was at 110.7 with 114.5 expected.
- Equity markets are mildly positive with most European indices up around 0.50%. US equity futures are awaiting Microsoft and Alphabet after the US closing bell.
- The CME Group’s FedWatch Tool shows that markets are pricing in a 97.9% possibility for an unchanged rate decision on Wednesday, with a slim 2.1% chance of a cut.
- The benchmark 10-year US Treasury Note trades near 4.05% and is the main driver for the US Dollar Index being unable to run away from current levels.
US Dollar Index Technical Analysis: DXY chained
The US Dollar Index (DXY) had traders at the edge of their seats, seeing if it was finally possible that the US Dollar was able to shun from those two important moving averages: the 55-day (103.06) and the 200-day (103.53) Simple Moving Average (SMA). The safe-haven inflow quickly abated after the US Defense issued statements to confirm it would not seek confrontation in the region after three US military were killed in a drone strike on a US base in Jordan. Meanwhile US equities are holding their breath for big tech earnings this week, as neither a sell-off nor a rally is unfolding at the moment, and no clear risk on or risk off is in play.
In case the DXY is able to run further away from the 200-day SMA, more upside is in the tank. Look for 104.36 as the first resistance level on the upside, in the form of the 100-day SMA. If that gets breached as well, nothing will hold the DXY from heading to either 105.88 or 107.20 – the high of September.
With the repetition of another break above the 200-day SMA, yet again, a bull trap could form once prices start sliding below the same moving average. This would see a long squeeze, with US Dollar bulls being forced to start selling around 103.10 at the 55-day SMA. Once below it, the downturn is open towards 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.
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