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    US Dollar sees losses following disappointing ADP data ahead of Fed decision

    Source Fxstreet
    Jan 31, 2024 17:53
    • The DXY Index trades with losses on Wednesday at 103.20.
    • ADP Employment change figures were lower than expected in January.
    • The Fed is expected to hold its policy unchanged in Wednesday’s meeting, messaging will be key.

    The US Dollar (USD), as reflected by the DXY Index, is currently trading at 103.20, experiencing losses as a result of weak data from the Automatic Data Processing (ADP) Employment Change report for January. Markets remain cautious ahead of the announcement of the Federal Reserve (Fed) decision later in the session.

    Market anticipation regarding the Fed's future decisions are shifting but remain restrained due to robust recent economic data, suggesting that earlier rate cuts are unlikely. The upcoming FOMC decision and jobs data are expected to further steer market sentiment and shape the easing cycle from the Fed.

    Daily Digest Market Movers: US Dollar dragged down by disappointing ADP figures

    • The ADP Employment Change for January reported by the US significantly missed expectations, with only 107K jobs added as compared to the consensus of 145K and previous figure at 158K.
    • On Thursday, markets will receive additional weekly Jobless Claims data; and on Friday, January’s Nonfarm Payrolls figures.
    • Market's perspective on the Federal Reserve's next move, as gauged by the CME FedWatch Tool, suggest that investors are confident that the bank won’t change its policy on Wednesday. As for now, markets are seeing the easing cycle starting in May.
    • However, the bank’s messaging and tone may change those expectations, setting the pace of the US Dollar for the rest of the week.

    Technical Analysis: DXY loses momentum, bulls fail to defend the 200-day SMA

    The indicators on the daily chart are reflecting a mixed bag of signals. The Relative Strength Index (RSI), despite its negative slope, is in positive territory. This typically indicates dwindling bullish momentum as buyers lose strength. The Moving Average Convergence Divergence (MACD) presents a similar view as the diminishing green bars could suggest that buying momentum is struggling to keep up its pace.

    The Simple Moving Averages (SMAs) reveal a somewhat bearish scenario in the larger picture. The DXY's position under both the 100 and 200-day SMAs showcases the bears' dominance in longer time frames. However, the index still remaining above the 20-day SMA reinforces that the bears still aren’t fully in command and will act as strong support in case of further downward movements.

    Support Levels: 103.15, 103.00, 102.90.
    Resistance Levels: 103.4 (200-day SMA),103.90,104.00,104.20.

     

     

    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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