US Dollar weakens further at start of data-driven week
- The US Dollar dips on Monday as selling pressure continues.
- Market sentiment turns nervous on an eventful week in the US economic calendar. .
- The US Dollar Index slides below 104.00 and could fall further on the back of data later this week.
The US Dollar (USD) is inching lower on Monday, extending Friday’s declines. Two main drivers for the Greenback to keep in mind this Monday: First, the landslide victory for former US President Donald Trump over Nikki Haley’s home state South Carolina, which puts Trump very close to secure the required amount of delegates for a Presidential bid. Second, the vast amount of key economic data points that are set to be released throughout this week, with second reading of the US Gross Domestic Product on Wednesday and the Personal Consumption Expenditures (PCE) Price Index on Thursday as the main drivers that could tip the market in any direction.
The week is off to a quiet start, with a very light calendar Still, the tone could get set already with the New Home Sales data. A further decline, together with the decline seen in Building Permits and Housing Starts last week, could confirm that the housing market is coming under pressure from this elevated interest-rate regime.
Daily digest market movers: Monday to assess
- Goldman Sachs said that Hedge Funds are offloading Tech shares at the fastest pace in seven months, Bloomberg reports.
- In London, a big energy conference is set to take place. Traders will be on the lookout for any headlines from major energy ministers and key people about Oil, Gas, and alternative energies.
- At 15:00 GMT, New Home Sales data will be published. Sales are expected to increase from 0.664 million to 0.680 million. Housing data last week pointed to some lowdown, which could get confirmed with this release. A slowing housing market could become a concern for the US Federal Reserve as it might be forced to lower its benchmark rates if potential issues in the US housing market spread to the financial system.
- The US Treasury will have a very busy day this Monday:
- Near 16:30 GMT, a 3-month and a 6-month bill are due to be released.
- At 18:00 GMT, a 2-year and a 5-year note will be placed in the market.
- Equities are looking bleak this Monday, with profit taking across the board. It looks like investors are reducing their exposure after the all-time highs seen last week and ahead of the key US inflation data later this week.
- According to the CME Group’s FedWatch Tool, expectations for a Fed pause in the March 20 meeting are at 97.5%, while chances of a rate cut stand at 2.5%.
- The benchmark 10-year US Treasury Note trades around 4.2%, which is more than 10 basis points lower from the peak last week.
US Dollar Index Technical Analysis: A buildup towards Thursday
The US Dollar Index (DXY) is facing some downside pressure on Monday. Expect a very nervous build-up to the main event on Thursday, the Personal Consumption Expenditures (PCE) Price Index release. The uptick in both the Consumer Price Index (CPI) and the Producer Price Index (PPI) numbers over the past two weeks is lifting market expectations for the PCE index, which means any number undershooting expectations might trigger a substantial leg lower in the DXY.
To the upside, the 100-day Simple Moving Average (SMA) near 104.05 is the first level to watch as it is a support that has been turned into a resistance. Should the US Dollar be able to cross 104.60, 105.12 is the next key level to keep an eye on. One step beyond there comes 105.88, the high from 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, possibly delaying it to the last quarter of 2024.
Looking down, the 200-day Simple Moving Average at 103.73 was broken on Thursday and should see more US Dollar bears flock in to trade the break. 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, the55-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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