US Dollar firms after ECB fails to move needle against strong US data

The Greenback rallies for a third straight day this week.
US yields continue to increase, nearing the 5% threshold again.
The US Dollar Index edges up after breaking back above 106.00 and flirts with 107.00 for this week.

The US Dollar (USD) reclaims its earlier gains from earlier this Thursday as a big batch of upbeat US data achieves victory over the European Central Bank and its President Christine Lagarde. During the verbal communication, Lagarde was trying to push the Euro higher against the Greenback. A very doom-and-gloom outlook on the eurozone, and refraining from issuing any forward guidance, leaves markets in the dark and makes investors favor the Greenback again over the Euro.

On the economic data front, no less than thirteen data points were issued all at the same time, near12:30 GMT. Nearly all data points were an upbeat surprise and are showing a staggering performance from the US economy. Once the dust will start to settle on this trading day and its data points and ECB press conference and communication, the Greenback should prevail on the back of this.

Daily digest: US Dollar confirms third straight gain

The European Central Bank (ECB) has kepts its benchmark rates unchaged at 4%, issuing a statement that it will keep its rate steady for longer to battle against the elevated inflation levels in the eurozone.
At 12:30 GMT, a big batch of US data was released:
1. Initial Jobless Claims came in at 210,000, an increase from 198,000. Continuing Claims went higher as well, from 1,727,000 to 1,790,000.
2. Personal Consumption Expenditures (PCE) Price Index for the third quarter saw the Core Index dropping from 3.7% to 2.4%.
3. Gross Domestic Product (GDP) data for the third quarter: the Price Index component went from 1.7% to 3.5%. The Annualised growth rate outperformed from 2.1% to 4.9%.
4. Durable Goods preliminary reading for September: The headline index was a big beat on expectations, from -0.1% to 4.7%. The component without transportation was kept steady at 0.5% .
Near 12:45 GMT, ECB President Christine Lagarde gave her speech and guidance. What stood out was the fact that she repeated several times the EU economy was weak and that the ECB refrains from any forward guidance at this point. Rate cuts apparently have not been discussed.
During that same press conference from the ECB, around 13:00 GMT, headlines or comments were expected from the Federal Reserve member Christopher Waller. Though apparently nothing on monetary policy was issued.
US housing data with Pending Home Sales made its way as well to the markets: Pending Home Sales for September went from -7.1% to +1.1% against August. The yearly component went from -18.3% to -11%.
The Kansas City Fed Manufacturing Index for October is expected around 15:00 GMT. The previous reading came at -13.
The US Treasury will try to refund two tenors this Thursday: at 15:30 a 4-week bill to be auctioned, and at 17:00 GMT a 7-year note to be allocated.
Equities are seeing investors flee ahead of the volatility this Thursday: Asian equities are sinking over 1% in Japan and Chinese equities are down by 0.5%. European equities are not expecting any help from the ECB this Thursday, and are sliding more than 1% . In the US, equity futures the Nasdaq is taking a beating and is trading over 1% in the red.
The CME Group’s FedWatch Tool shows that markets are pricing in a 97.1% chance that the Federal Reserve will keep interest rates unchanged at its meeting in November.
The benchmark 10-year US Treasury yield trades at 4.91%, popping back to that feared 5% level. The million Dollar question here is what will happen once the benchmark breaks back above 5%.

US Dollar Index technical analysis: Rate differential is the guide forward

The US Dollar is climbing the ladder again after being in the gutter at the start of the week. The Greenback is on its way back to its throne as the DXY US Dollar Index is shooting higher and might even stretch further. Risk element hanging over a possible implosion of the DXY hangs in the balance, with the US 10-year yield flirting again with 5%.

The DXY has consolidated above 106.00 and looks to keep stretching higher. Look for a possible jump above 106.92. If this level can be reclaimed by US Dollar bulls, then look for 107.00 on the topside again.

On the downside, the recent resistance at 105.88 did not do a good job supporting any downturn and now completely has lost its importance. Instead, look for 105.12, which is a pivotal historic line and almost falls in line with the 55-day Simple Moving Average (SMA) to keep the DXY above 105.00, and which worked already quite ahead of it on Tuesday. Should this level fail to do the trick, a big air pocket could develop and see the DXY drop to 103.74, near the 100-day SMA, before finding ample support.

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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