US Dollar DXY falls below the 20-day SMA, eyes on GDP and Core PCE next week

The US Dollar struggles to find demand at the end of the week.
Markets are digesting Powell’s words on Thursday.
US Treasury yields are retreating and the odds of a hike in December declined.

The US Dollar (USD) measured by the US Dollar Index (DXY) oscillates between gains and losses in the 106.15 area, trading below the 20-day Simple Moving Average (SMA). No relevant data will be released on Friday and the focus shifts to the Israel and Palestine conflict which could benefit the USD as a safe-haven asset.

In the United States, economic activity was reported to be better than expected in September. Industrial Production and Retail Sales both came in above expectations. On Wednesday, the Federal Reserve’s Beige Book report described the US economic situation as “stable” and didn’t reveal any new insights since the last September report. Next week, the US will release S&P Manufacturing PMIs from October, which may have an impact on the expectations from the Federal Reserve’s (Fed) next set of forecasts. In addition, the US will report the preliminary estimate of the Q3 GDP (Gross Domestic Product) and the Core Personal Consumption Expenditures (PCE) from September.

Daily Digest Market Movers: US Dollar fails to gather momentum as US Treasury yields and hawkish bets on the Fed decline

The US Dollar DXY declined near 106.15, seesawing between small gains and losses, but still trading below the 20-day SMA.
The US reported better-than-expected economic activity data during the week, which could limit the downside for the DXY.
US Retail Sales came in at 0.7% MoM in September, higher than the 0.3% expected but decelerating from 0.8%.
Industrial Production rose by 0.3% MoM in the same month, vs the 0.0% expected.
Jobless Claims for the week ending on October 13 came in at 198,000, lower than the expected 212,000 and the previous 211,000.
In the meantime, US yields are retreating while markets assess Federal Reserve Chair Jerome Powell’s words: the 2, 5 and 10-year rates have increased to 5.07%, 4.85% and 4.91% respectively.
According to the CME FedWatch tool, the odds of a 25 bps hike at the December meeting stand near 24%, falling from nearly 40% at the beginning of the week.
Next week, the US will release the first estimate of the Q3 GDP and Personal Consumption Expenditures (PCE), including the Core PCE from September, the Fed's preferred gauge of inflation.

Technical analysis: US Dollar Index’s bulls failed to defend the 20-day SMA, still bears have more work to do

The DXY index is in an intermediate bullish trend on the daily chart, holding above the key 100 and 200-day Simple Moving Average (SMA). However, in the short term, bears have gathered enough momentum to give them an upper hand over the bulls.

On the daily chart, the Relative Strength Index (RSI) is seen pointing south, though still above its middle point of 50. The Moving Average Convergence Divergence (MACD) saw a bearish cross on October 5, though the trend lower flipped on October 12 when the market made a recovery. Given the dominant uptrend, the exchange rate could still rally.

The index has had a strong run higher, with 11 consecutive up-weeks in a row before peaking and forming a bearish doji/shooting star candlestick in the first week of October. This was not followed through to the downside, however, with the following week closing higher. Still it is a warning sign of potential weakness on the horizon.

Supports: 106.00, 105.80, 105.80.

Resistances:106.33 (20-day SMA),106.50, 107.00.

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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