US Dollar sinks in final trading hours ahead of Christmas with all bets on quick Fed rate cuts

The US Dollar falls back to session's low.
Equity markets jump higher this week as investors go all in on early Fed rate cuts.
The DXY US Dollar Index sinks below 102.00, faces selling pressure at start of US session

The US Dollar (USD) is facing increasing selling pressure as investors are increasingly pricing in interest-rate cuts for early 2024. Markets are opting to ignore remarks and warnings from several US Federal Reserve officials, who are trying to play down expectations of upcoming cuts. While US equities are having a Christmas rally, US bond yields have plunged, leading the spread gap between the US Dollar and foreign currencies to shrink substantially.

On the economic front, the second-to-last datapoints are out. Durable Gods is an upbeat surprise on all fronts and gives the US Dollar some fuel to fight back. Fact that Consumers are still spending and are even spending more, means that a recession is not yet at hand, which is needed for those rate cuts markets are so keen on to have in early 2024. Michigan numbers are no surprise and markets are using them as confirmation of the decline in inflation.

Daily digest Market Movers: Michigan fuel for rate cut believers

A very chunky batch of data was be released at 13:30 GMT:
- Personal Consumption Expenditures (PCE) is due to be released:
  - Yearly Core PCE went from 3.4% to 3.2%.
  - Monthly Core PCE went from 0.2% to 0.1%.
  - Yearly Headline PCE headed lower from 2.9% to 2.6%.
  - Monthly Headline PCE shrunk from 0% to -0.1%.
- Durable Goods Orders for November were released as well:
  - Durable Goods Orders rose to 5.4%.
  - Durable Goods without transportation went from -0.3% to 0.5%.
  - Personal Income went from 0.3% to 0.4%.
  - Personal Spending will tick up as well, considering the revised 0.2% to 0.1% with current number in at 0.2%.
The Last numbers was the University of Michigan consumer sentiment which went from 69.4 to 69.7 in its final reading. Inflation expectations went from 2.8% to 2.9%, still below 3%.
The University of Michigan Consumer Sentiment Index is set to remain unchanged at 69.4 in December. Five-year inflation expectations are also seen unchanged at 2.8%.
New Home Sales for November are expected to jump from 0.679 million to 0.685 million.
Equities are looking for direction, with minor gains as most takeaways. Asian markets closed near flat, except for the Hang Seng index, which closed down over 1.6% after the Chinese government released new measures to crack down on the gaming industry.
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 14.5% expect the first cut already to take place.
The benchmark 10-year US Treasury Note trades near 3.88%, the lowest level since summer.

US Dollar Index Technical Analysis: DXY has hangover

The US Dollar Index is having one of its worst weeks in the last quarter. With trading desks cleaning up their balance sheets, it becomes clear that several US Dollar bulls have further unwounded their positions in the Greenback. With the relentless drop in US yields, the rate differential story has come to an end for 2023, with markets going all in on a further decline for early 2024.

Any upbeat surprise in data that could contradict rate cut bets or geopolitical events that trigger US Dollar inflow could still make the DXY head higher. On the daily chart, look for 103.00 as the first level to watch. Once trading above there, the 200-day Simple Moving Average (SMA) at 103.50 is the next important level to get to.

To the downside, the pivotal level at 101.70 – the low of August 4 and 10 – is vital to hold and still see a close this evening above it. Once broken, look for 100.82, which aligns with the bottoms from February and April. Should that level snap, nothing will stand in the way of DXY heading to the sub-100 region.

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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