US Dollar volatile trading despite thin liquidity and year-end flows

Most Recent Article: US Dollar reverses its course despite negative Jobless Claims

The US Dollar gapped opened on Thursday after a big miss on the Richmond Manufacturing Index.
Equity markets are steady while US bond markets are seeing substantial buying.
The US Dollar Index has a wild ride and is near flat after the US Opening Bell.

The US Dollar (USD) took another nosedive in Asian trading on Thursday. The opening gap against the close from Wednesday was not a positive sign for the Greenback in the US Dollar Index (DXY). Though just minutes after the US opening bell, the DXY has completely reversed earlier losses and is flat for this Thursday, flirting with a pop back above 101.

On the economic front, the Jobless Claims data added to some support for the much battered Greenback. Although there was a jump in both Initial and Continuing Claims, the previous numbers were revised down. That means that the starting point for this week's increase in Jobless Claims is starting at tighter, lower point against where it is at the moment.

Daily digest Market Movers: Home Sales did nothing

Near 13:30 GMT the Jobless Claims have come out:
- Initial Jobless Claims went from 206,000 to 218,000, while that 206,000 got revised from 205,000.
- Continuing Claims went from 1,861,000 to 1,875,000, though the previous number was at 1,865,000. So a downward revision from the previous number and the new print in line with expectations.
At the same time, Wholesale Inventories came out and went from -0.4% to -0.2% as expected.
The Goods Trade Balance for November wetn from -89.8 billion USD to -90.3 billion USD.
At 15:00, Pending Home Sales did not move the market despite heading to 0% on the monthly change, against -1.2% on the previous month.
The US Treasury is heading to markets for some cheaper funding, allocating a 4-week bill and a 7-year Note.
Equities are going sideways with only one outlier: China. Both the Hang Seng and the Shenzhen Index are up over 2% after the Chinese regulator backtracked on earlier comments of a crackdown on electronic gaming and gambling companies.
The CME Group’s FedWatch Tool shows that markets are pricing in an 83.5% chance that the Federal Reserve will keep interest rates unchanged at its January 31 meeting. Around 16.5% expect the first cut already to take place. The uptick in favour of a rate cut comes after the big miss on expectations and further negative number in the Richmond Manufacturing Index on Wednesday.
The benchmark 10-year US Treasury Note trades near 3.82%, off the lowest level of this Thursday.

US Dollar Index Technical Analysis: DXY able to end 2023 above 100

The US Dollar Index is gasping for air with US yields sinking lower across the yield curve in different maturities. Although the yields of other currencies are seeing their yields drop as well, markets are having tunnel vision with focus on the Greenback. Seeing the very thin-populated trading desks and several investors being out of the markets, not much counterweight is present to turn the ship back in favour of the Greenback for the remaining part of 2023.

First upside resistance to face is near 101.78 at the low of December 21. Although a long way to go, it looks not unthinkable that the DXY might test the descending trend line near 103.00. Depending on the catalyst that fuels the recovery in the Greenback, the 200-day Simple Moving Average (SMA) near 103.45 is firm last resistance before having more upside.

To the downside, the pivotal level at 101.70 – the low of August 4 and 10 – is now gone and holds no bearing anymore for support as it is too far gone. The current level, near 100.82, which aligns with the bottoms from February and April, could still hold some relevance and might hold for this Thursday. Should that level snap, nothing will stand in the way of DXY heading to the sub-100 region.

Dot Plot FAQs

What is the Federal Reserve “Dot Plot”?

The “Dot Plot” is the popular name of the interest-rate projections by the Federal Open Market Committee (FOMC) of the US Federal Reserve (Fed), which implements monetary policy. These are published in the Summary of Economic Projections, a report in which FOMC members also release their individual projections on economic growth, the unemployment rate and inflation for the current year and the next few ones. The document consists of a chart plotting interest-rate projections, with each FOMC member’s forecast represented by a dot. The Fed also adds a table summarizing the range of forecasts and the median for each indicator. This makes it easier for market participants to see how policymakers expect the US economy to perform in the near, medium and long term.

When does the Federal Reserve publish the “Dot Plot”?

The US Federal Reserve publishes the “Dot Plot” once every other meeting, or in four of the eight yearly scheduled meetings. The Summary of Economic Projections report is published along with the monetary policy decision.

Why is the “Dot Plot” important for markets?

The “Dot Plot” gives a comprehensive insight into the expectations from Federal Reserve (Fed) policymakers. As projections reflect each official’s projection for interest rates at the end of each year, it is considered a key forward-looking indicator. By looking at the “Dot Plot” and comparing the data to current interest-rate levels, market participants can see where policymakers expect rates to head to and the overall direction of monetary policy. As projections are released quarterly, the “Dot Plot” is widely used as a guide to figure out the terminal rate and the possible timing of a policy pivot.

How does data in the “Dot Plot” affect the US Dollar?

The most market-moving data in the “Dot Plot” is the projection of the federal funds rate. Any change compared with previous projections is likely to influence the US Dollar (USD) valuation. Generally, if the “Dot Plot” shows that policymakers expect higher interest rates in the near term, this tends to be bullish for USD. Likewise, if projections point to lower rates ahead, the USD is likely to weaken.

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