US Dollar trades at loss following the release of December's PCE data
- DXY Index records a loss, unable to consolidate past 200-day SMA.
- Core PCE figures from December came in weak.
- Markets are still pushing the start of the Fed’s easing cycle to May.
The US Dollar (USD) Index is presently grappling with losses, trading at 103.35 on the DXY, in response to the release of softer Personal Consumption Expenditures (PCE) data for December, which gave the doves hope of earlier rate cuts.
In that sense, market expectations hint at a possible rate cut by the Fed in March. However, if economic growth sustains itself, a March rate cut seems unlikely. This is why bets have continued to shift toward the easing cycle beginning in May. In case the US continues to show resilience and markets delay expectations of the cuts, the downside is limited for the short term.
Daily Digest Market Movers: US Dollar declines after December PCE data
- The December Core PCE Price Index (YoY), the Fed’s preferred gauge of inflation, came in at 2.9%, slightly under the consensus of 3% and a decrease from the previous 3.2%.
- The headline index remained constant at 2.6% as anticipated.
- The 2-year, 5-year and 10-year US bond yields are on the rise, currently trading at 4.35%, 4.04% and 4.14%, respectively.
- The CME FedWatch Tool indicates that no changes in hike rates are expected for the January meeting, while markets are hinting at rate cuts in March and May 2024 with higher odds for the easing cycle to start in the latter.
Technical Analysis: DXY Index short-term buying pressure wanes as bulls struggle to defend the 200-day SMA
The indicators on the daily chart reflect a tussle between buying and selling pressure. The Relative Strength Index (RSI) showcases a negative slope yet remains in positive territory, hinting toward diminishing buying momentum. Thus, a potential shift toward sellers might be on the cards.
In unison, the Moving Average Convergence Divergence (MACD) indicator is also signaling a decline in upward pressure as the green bars on the histogram have started to decrease.
On observing the position of the index relative to its Simple Moving Averages (SMAs), we notice a mix of buying and selling pressure. The DXY holding above the 20-day SMA suggests attempts by bulls to control the short-term market trend, even as lingering bearish undertones persist.
The fact that the index is still below the 100 and 200-day SMAs, however, indicates that bears are maintaining a bullish grip on the broader context. The sellers seem to be dominating the narrative in the longer run, with the bulls struggling to gain ground.
Support Levels: 103.30, 103.00, 102.80, 102.60 (20-day SMA).
Resistance Levels: 103.50 (200-day SMA), 103.70, 103.90.
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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