US Dollar advances despite lower GDP revisions
- DXY index is showing gains, currently standing at 103.90, after hitting a high of 104.20.
- The second estimate of Q4 US GDP came in at 3.2%, lower than expected.
- Expectations of the Fed delaying cuts favor the Greenback.
The US Dollar Index (DXY) is trading around 104.00, experiencing its first significant rise since mid-February after hitting 104.20 earlier in the session. This increase can largely be attributed to a decline in foreign currencies in response to a dovish hold by the Reserve Bank of New Zealand (RBNZ), which seems to be overshadowing soft Q4 Gross Domestic Product (GDP) revisions from the US.
Meanwhile, the US Federal Reserve (Fed) maintains a notably consistent, reluctant stance on cutting rates prematurely, signaling a hawkish bias via its officials. Market sensitivity to this stance has reduced expectations of an imminent rate cut, with odds for March at zero, May at 20%, and June around 50%. This seems to be providing a cushion for the Greenback.
Daily digest market movers: US Dollar gains as markets push back rate cut outlook
- The US reported that the GDP annualized growth rate was revised down to 3.2%, slightly below the consensus of 3.3%.
- To continue placing bets on the next Fed decisions, market participants are now awaiting the release of the Personal Consumption Expenditures (PCE) Price Index due on Thursday.
- Market expectations for the Fed's decisive actions have converged. The market now anticipates only 75 bps of total easing in 2024, down from 150 bps at the start of the year, and this aligns with the Fed’s rate projections.
Technical analysis: DXY bulls gain some ground, but must conquer 20-day SMA
On the daily chart, the Relative Strength Index (RSI) shows a positive slope in positive territory, indicating buyers have started gaining momentum. Nonetheless, bulls struggle to capture further ground, suggesting a possible exhaustion in their momentum.
The Moving Average Convergence Divergence (MACD) reflects a set of decreasing red bars. This tells us that, despite the buyer's force in the market, there is a palpable selling pressure visible. Looking at the Simple Moving Averages (SMAs), the index is beneath the 20-day and 100-day SMAs, affirming the short-term bearish outlook. Conversely, its position above the 200-day SMA implies that bulls are maintaining their strength in the grander time frames.
In summary, the current technical indicators suggest a precarious balance between buying and selling forces with a short-term bearish bias, which might be starting to wane. However, the long-term view remains bullish, evidenced by the pair's stance above the 200-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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