US Dollar falls to three-week low as market sentiment improves
- The US Dollar trades deep in the red after the publication of the Fed Minutes.
- Market sentiment improves after Nvidia earnings beat and a fresh all-time high for the Japanese Nikkei.
- The US Dollar Index falls sharply below 104.00, and bears try to break the heavy-weight 200-day SMA.
The US Dollar (USD) is facing a dropkick moment on Thursday after a string of events accelerated a downside move in the US Dollar Index (DXY) overnight. The first decline came on the back of the US Federal Reserve releasing the Minutes of its January meeting. The decrease came even though several participants in the Federal Open Market Committee (FOMC) expressed their concerns about cutting rates too quickly, having learned their lessons from the former policy mistake made in the 1980s by Fed Chairman Paul Volcker. With the DXY hammered, a second selling wave for the Greenback took place after Nvidia posted jawbreaking earnings, spilling the upbeat market mood into Asia, where the Japanese Nikkei hit all-time highs.
On the economic data front, a very chunky calendar ahead on Thursday with some leading indicators. Apart from the usual market-moving Initial Jobless Claims, the Purchasing Managers Index (PMI) numbers for February are due as well. Throw in no less than four Fed speakers and volatility looks to be guaranteed.
Daily digest market movers: Fed does not care about markets
- A chunky calendar is set to kick off near 13:30 GMT:
- The Chicago Fed National Activity Index for January is due to be released. The previous print came in at -0.15.
- Jobless Claims are to be released as well:
- Initial Claims are seen heading from 212,000 to 218,000.
- Continuing Claims are expected to shrink from 1.895 million to 1.885 million.
- S&P Global’s preliminary Purchasing Manager Index numbers for February are expected to be released at 14:45 GMT.
- The Services PMI is expected to head from 52.5 to 52.
- The Manufacturing PMI is seen heading from 50.7 to 50.5.
- Existing Home Sales data for January will come out at 15:00 GMT. Sales are expected to increase from 3.78 million to 3.97 million.
- The Kansas Fed Manufacturing Activity Index for February will be released near 16:00 GMT. The previous print was at -17.
- If Fed watchers are hungry for more, this Thursday will feature no less than four Fed members lined up to speak:
- Fed Vice Chair Philip Jefferson is due to speak at 15:00 GMT.
- Philadelphia Fed President Patrick Harker will take the stage at 20:15 GMT.
- Minneapolis Fed President Neel Kashkari will speak at 22:00 GMT.
- Fed board member Lisa Cook is to close off this Thursday with comments near 22:00 GMT.
- Equities are in the green across the board. The Nikkei has printed new all-time highs earlier this Thursday, and the German Dax shot above 1% at the European opening bell. US equity futures are all in the green, with the Nasdaq flirting with 2% gains ahead of the opening bell.
- The CME Group’s FedWatch Tool is now looking at the March 20 meeting. Expectations for a pause are at 95.5%, while chances of a rate cut stand at 4.5%.
- The benchmark 10-year US Treasury Note trades around 4.31% in the Fed Minutes release aftermath.
US Dollar Index Technical Analysis: Markets ahead of the Fed
The US Dollar Index (DXY) retreated below 104.00 overnight. Although concerns amongst Fed members about premature interest-rate cuts is the main takeaway from the Fed Minutes, markets see it as being on track for their June timing for a rate cut. Meanwhile, Nvidia earnings have sparked a wave of risk appetite across the globe, that sentiment is a second driver for an abating Greenback this Thursday. Later today, US PMI numbers could take back some of the recent losses.
To the upside, the 100-day Simple Moving Average (SMA) near 104.98 is the first level to watch as a support that has been turned into a resistance. Should the US Dollar jump to 105.00 on the back of strong PMI numbers, 105.12 is a key level to keep an eye on. One step beyond there comes 105.88, the high of November 2023. Ultimately, 107.20 – the high of 2023 – could even come back into scope, but that would be when markets reprice the timing of a Fed rate cut again, delaying it to the last quarter of 2024.
The 200-day Simple Moving Average at 103.72 has been broken and should see more US Dollar bears flock in to trade the break for a weaker US Dollar. The 200-day SMA should not let go that easily, so a small retreat back to that level could be more than granted. Ultimately, it will lose its force with the ongoing selling pressure and could fall to 103.16 at the 55-day SMA.
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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