US Dollar trades lower following soft housing data
- The DXY Index slips on Monday, trading down to 103.80.
- Fed's hesitance to cut rates has stirred the market and may limit DXY losses.
- New Home Sales data for January was lower than expected at 0.66 million.
The US Dollar Index (DXY) is trading at 103.80, reflecting a slight decline. The underperformance comes after the report of soft January housing data from the US, while the Federal Reserve (Fed)'s expressed hesitation toward premature rate cuts may limit the downside. Looking forward, investors await significant forthcoming reports to glean further understanding of the health of the economy including Core and Personal Consumption Expenditures (PCE) and Gross Domestic Product (GDP) revisions later this week.
The Fed, unwavering since January's FOMC meeting, rejects premature rate cuts. Markets heed the stance with the odds of March and May cuts remaining low. As for now, the best-case scenario for markets is that the bank will start cutting in June, but it will all come down to the incoming data. PCE data and GDP revisions will be key.
Daily digest market movers: US Dollar weakened by soft housing data
- January's New Home Sales, as reported by the US Census Bureau, exceeded market expectations by 0.66M against the forecast of 0.68M.
- As per the CME FedWatch Tool, a hold in the March and May meetings are being priced in, while the odds of a cut in June remain the strongest case, but the odds are somewhat low, around 53%.
- In case PCE and GDP data come in softer than expected, those odds may change in favor of dovish rhetoric and weight on the US Dollar.
Technical analysis: DXY Index’s bearish movement dominates as sellers conquer key level
On the daily chart, the Relative Strength Index (RSI) exhibits a negative slope residing in negative territory, an indication that selling pressure outweighs buying momentum in the market. Concurrently, the Moving Average Convergence Divergence (MACD) signals a bearish outlook as well. The red bars are lengthening on the histogram, implying rising selling momentum. This highlights an amplified bearish force, contributing to the weakening of the pair.
However, the positioning of the Simple Moving Averages (SMAs) paints a more nuanced picture. Despite the Index now trading below the 20-day and 100-day SMAs, which supports the bearish sentiment, it's still above the 200-day SMA. This upward breach can be interpreted as a demonstration of robust resilience by the bulls in the larger context, hinting that buyers are fighting to regain control. That being said, credit should be granted to bears, who managed to breach the key 20-day average, which recently acted as a key support.
This suggests that, for now, the selling force is dominant over the buying momentum, but if the buyers defend the 200-day SMA, the overall positive bias will remain intact.
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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