US Dollar starts Thanksgiving week on the back foot as positioning is at critical point

The Greenback opens Thanksgiving week in the red at a fresh two-month low.
Traders are further betting on rate cuts from the biggest central banks.
The US Dollar Index holds above 103.00, though a sell-off could result into the DXY near 101.00

The US Dollar (USD) is kicking off this festive week in the red while US traders are compiling their wish list for the Black Friday deals ahead of the turkey dinner on Thursday. The US Dollar Index (DXY) has snapped some substantial technical indicators that hold big relevance as support or resistance. With a very light economic calendar this week, not many elements can be pushed forward for a turnaround in the current downturn for the Greenback.

The calendar for this Monday is very light, with just a few bond auctions from the US Treasury. On Tuesday traders will brace for the FOMC Fed Meeting Minutes from their latest rate decision. Before Thursday’s national holiday, the University of Michigan will print its final November data and the week will be closed with the flash S&P Global Purchase Managers Index (PMI) numbers.

Daily digest: US session hits pauze on Dollar decline

ECB member Pierre Wunsch mentioned that the more markets run ahead on rate cuts, the more inclined the ECB will be to hike rates.
Comments from the US Treasury Secretary Janet Yellen, who said that there has been considerable progress in bringing inflation down.
Geopolitical tensions are flaring up as over the weekend there were rumours over an agreement of a five-day ceasefire, though the US refrained from confirming. Meanwhile, this Monday morning a tanker in the Strait of Hormuz got seized by Iran-backed rebels, Tokyo-based Nippon Yusen KK reported, who chartered the ship.
The US Treasury will be going to the markets to relocate a few bonds:
- A 3-month bill will be issued at 16:30 GMT.
- A 6-month bill will be issued at 16:30 GMT.
- A 20-year bond auction will take place at 18:00 GMT.
Overnight, the People’s Bank of China (PBoC) issued a much stronger fixing for its Yuan, pushing the Chinese currency substantially stronger against the Greenback by 0.70%.
Additionally, the Greenback is losing over 1% against the Japanese Yen.
Equities are looking for direction as the question stands whether a recession will take place before or after central bank interest-rate cuts. The only notable outlier this Monday is the Hang Seng Index, which is up near 2% at the Chinese closing bell. All US futures ahead of the opening bell are flat.
The CME Group’s FedWatch Tool shows that markets are pricing in a 99.8% chance that the Federal Reserve will keep interest rates unchanged at its meeting in December. A small 0.2% believes a cut is due to unfold.
The benchmark 10-year US Treasury Note yield trades at 4.46%.

US Dollar Index technical analysis: a key week for DXY

The US Dollar is signalling distress to the markets, accumulating several red lights flashing when gauged by the US Dollar Index (DXY). Both on the daily and the weekly chart, the DXY is snapping several important support areas, which could mean a bigger and broader downtrend for weeks and months to come from a pure technical perspective. Especially the break of the 200-day SImple Moving Average (SMA) on the daily chart, combined with the weekly break below both the 55-day and 100-day SMA, is a worrying sign that the DXY could depreciate even more.

The DXY was unable to bounce off the 100-day SMA and is treading water at the 200-day SMA. Look for the recovery bounce towards the 100-day SMA near 104.20. Should the DXY be able to close and open above it, look for a return to the 55-day SMA near 105.71 with 105.12 ahead of it as resistance.

Traders were warned that when the US Dollar Index would slide below that 55-day SMA, a big air pocket was opening up that could see the DXY fall substantially. The 200-day SMA is trying to keep everything together, though should there be a further decline, the psychological 100-level comes into play. With a very slim economic calendar and several US market participants off the desk for the holidays, there is room for a potential big downturn this week.

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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