- The US Dollar has struck a double-whammy with positive US data and a disappointing ECB on Thursday.
- Traders see the PCE print not really suprising or calling for a rate cut in the coming months.
- The US Dollar Index breaks out of a range and could finally be able to trade away from it.
The US Dollar (USD) is paring back some gains that got collected in the aftermath of the US tripod print of US Gross Domestic Product - Durable Goods - Jobless Claims on Thursday. At that same time on Thursday the European Central Bank (ECB) disappointed the market by not sticking out its neck and providing forward guidance to the markets on rate cuts. Traders though are starting to take some profit on the move, seeing it not advancing any further this Friday.
On the economic front, traders have little to get excited about with the Personal Consumption Expenditures (PCE) falling perfectly in line with expecations. Only element that tilts to a bit of US Dollar weakness is the Core PCE number on the yearly timeframe that heads from 3.2% ot 2.9%, where 3% was expected. Though, traders are not betting on this 10 basis points undershooting of estimate will be enough for the US Federal Reserve to start cutting in March already.
Daily digest market movers: That's all folks!
- Sweden is set to join NATO once Hungary ratifies the agreement in parliament after Turkey already did earlier this week.
- US Treasury Secretary Janet Yellen said during an interview with ABC that she sees “no reason” for a recession this year.
- The Personal Consumption Expenditures (PCE) data for December has been released:
- Monthly Headline PCE went from -0.1% to 0.2%.
- Yearly Headline PCE came ou, as expected, at 2.6%, unchanged.
- Monthly Core PCE is heading from 0.1% to 0.2%.
- Yearly Core PCE was the only main surprise, declining from 3.2% to 2.9%.
- Personal Income went from 0.4% to 0.3%.
- Personal Spending went from a revised up 0.4% to 0.7%.
- Last data point for this Friday comes near 15:00 with Pending Home Sales, expected to head from 0% to 1.5% for December versus November.
- Equity markets are in the red this last day of the week with in Asia all indices down over 1% for Japan and China. European equities are shooting higher by 1%. US Futures are quickly reversing earlier losses towards the opening of the US trading session.
- The CME Group’s FedWatch Tool shows that markets are pricing in a 97.4% possibility for an unchanged rate decision on January 31, with a slim 2.6% chance of a cut.
- The benchmark 10-year US Treasury Note trades near 4.14%, and ties up with the higher levels of earlier this week.
US Dollar Index Technical Analysis: PCE out of the way
The US Dollar Index (DXY) is having a copy-paste moment from earlier this week of last week’s performance. Again the DXY is able to snap above the 200-day Simple Moving Average (SMA) near 103.51, though could face headwinds from the PCE print later this Friday. If the DXY is unable to close off this Friday or this week for that matter, above the 200-day SMA, expect to see another downfall with a test at 103 for a break lower.
In case the DXY would be 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 get formed once prices would start sliding below the same moving average. This would see a long squeeze with US Dollar bulls being forced to start selling around 103.14 at the 55-day SMA. Once below it, the downturn is open towards 102.00.
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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