US Dollar prints fresh high since December 13th, with flight to safe havens on Red Sea turmoil and US data releases this week

The US Dollar continues to trend upwards from late Friday.
Traders gear up for a very packed week with all eyes on the Fed decision due on Wednesday.
The US Dollar Index could break down from current levels at around the 200-day SMA.

The US Dollar (USD) is split in half with on the one hand the Greenback up against the import dependent nations and currencies like the eurozone (EURUSD), Scandinavia (USDSEK and USDNOK) and Central Europe (USDPLN). Meanwhile, oil rich countries such as Canada (USDCAD) and commodity exporters (AUDUSD and NZDUSD) are up versus the US Dollar. The moves comes with markets being in a cramp on the risk of US military forces being sent to the Red Sea area after three US military people were killed during a drone strick on an US base in Jordan.

On the economic front, some market-moving elements are coming out even before the Fed meeting, namely Tuesday’s JOLTS Job Openings data for December. On Wednesday, the US Federal Reserve rate decision and the speech by its Chairman Jerome Powell is due. Traders will need to keep some ammunition for other the main events on Thursday and Friday: The Institute for Supply Management (ISM) will release its Manufacturing PMI on Thursday, while Nonfarm Payrolls and the final University of Michigan Sentiment Index will be published on Friday to close off the week.

Daily digest market movers: Dallas Manufacturing shrinks

US defense said on Monday ahead of the US trading session, no battleplans are on the table and rather looks to defuse the tensions. The statement comes with markets expecting retaliation from the US after Iran hit a US military base in Jordan, left three US military people killed.
European Central Bank (ECB) member Luis de Guindos said that the Red Sea situation does not impact the next rate decisions for the ECB, according to Bloomberg. This contradicts comments from ECB President Christine Lagarde, who said last week during the rate decision meeting that the Red Sea situation could add to inflationary pressures and must be monitored.
Major Chinese construction group Evergrande has been deemed bankrupt and in default by a Hong Kong court. The ruling came after creditors didn’t reach a restructuring deal.
Red Sea risk is escalating again after several headlines were issued over the weekend of increasing violence between Houthi rebels and US forces.
The Dallas Fed Manufacturing Business Index for January was released and contracted further from -10.4 to -27.4.
The US Treasury will be placing a 3-month and a 6-month bill near 16:30 GMT.
Equity markets in Europe are looking for direction even after Asian indices closed in the green earlier this Monday. Japan saw both the Nikkei and the Topix close up nearly 1%. US Futures are flat or mildly in the red.
In the Earnings Season, big tech is due this week with Microsoft, Apple, Amazon and Meta to release their earnings this week as well.
The CME Group’s FedWatch Tool shows that markets are pricing in a 97.9% possibility for an unchanged rate decision on Wednesday, with a slim 2.1% chance of a cut.
The benchmark 10-year US Treasury Note trades near 4.10% and is showing small signs of a breakup in correlation with the US Dollar Index (DXY). Although there is some US Dollar strength at hand this Monday, the US bond market is not really following suit.

US Dollar Index Technical Analysis: DXY prints fresh monthly high since December 13th

The US Dollar Index (DXY) is breaking out of the range from the past two weeks, and moves away from two very important moving averages: the 55-day (103.10) and the 200-day (103.51) Simple Moving Average (SMA). The turn of events and data last week proved not enough to push the US Dollar Index higher. Expect the Fed meeting and the US Jobs Report to be pivotal for the Greenback this week.

In case the DXY is able to run further away from the 200-day SMA, more upside is in the tank. Look for 104.41 as the first resistance level on the upside, in the form of the 100-day SMA. If that gets breached as well, nothing will hold the DXY from heading to either 105.88 or 107.20 – the high of September.

With the repetition of another break above the 200-day SMA, yet again, a bull trap could form once prices start sliding below the same moving average. This would see a long squeeze, with US Dollar bulls being forced to start selling around 103.10 at the 55-day SMA. Once below it, the downturn is open towards 102.00.

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money.
When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

How often does the Fed hold monetary policy meetings?

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions.
The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

What is Quantitative Easing (QE) and how does it impact USD?

In extreme situations, the Federal Reserve may resort to a policy named 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 during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

What is Quantitative Tightening (QT) and how does it impact the US Dollar?

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.

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