US Dollar firmly in the green while equities pair back Monday's gains

The US Dollar trades in the green while equities retreat.
Traders will look at US Trade Balance numbers.
The US Dollar Index remains above 102.00, though downside pressure remains present.

The US Dollar (USD) trades broadly steady on Tuesday’s European morning, posting gains against most G20 currencies. Still, measured by the DXY US Dollar Index, the Greenback was easing a touch as a firm risk-on tone returned on Monday in US equity markets. Asian stocks took over the mood on Tuesday, with the Japanese Nikkei Index posting a fresh 34-year high at the closing bell.

On the economic front, another light agenda is due on Tuesday, with only second-tier data releases. Traders will be on the lookout to hear Federal Reserve’s Vice Chairman Michael Barr speak later this Tuesday. There are no big catalysts on the docket in the runup to the US Consumer Price Index (CPI) report on Thursday.

Daily digest market movers: Businesses are optimistic

The National Federation of Independent Business (NFIB) has released its Business Optimism Index for December at 11:00 GMT. The November figure was 90.6, with December coming in at 91.9.
European Central Bank (ECB) member Mário Centeno said that the ECB does not need to wait until May to make a rate decision, with December inflation being considered as very good news in the fight against inflation. The Euro takes a step back against the US Dollar (EUR/USD) on the back of these dovish comments.
At 13:30 GMT, the US Trade Balance numbers for November were released:
- The US Goods Trade Balance posted a $90.3 billion deficit in October, with the November number coming in at $89.4 billion.
- The US Goods and Services Trade Deficit for November went from a revised $-64.5 billion to $-63.2 billion.
The US Redbook for the first week of January went from 5.6% to 5.9%.
Fed’s Vice Chairman Michael Barr is due to speak around 17:00 GMT.
The US Treasury will be heading to markets to allocate a 3-year note around 18:00 GMT.
Equity markets are mixed on Tuesday. Asian markets are in the green after the Nikkei reached a 34-year high at its close for Tuesday. European equities are looking for direction halfway through their session, while US equity futures are down by a quarter of a percent.
The CME Group’s FedWatch Tool shows that markets are pricing in a 95.3% chance that the Federal Reserve will keep interest rates unchanged at its January 31 meeting. Around 4.7% expect the first cut already to take place.
The benchmark 10-year US Treasury Note holds near 4%, though calls are being issued by investors and banks that the 4% needs to be revised down.

US Dollar Index Technical Analysis: Stronger in the US session

The US Dollar is in the green this Tuesday, though be it marginally against most major peers. This makes the US Dollar Index (DXY) look like a standstill, as safe-haven inflows on the back of geopolitical tensions are being matched by the risk-on tone that triggered US Dollar selling. Ahead of the key inflation data on Thursday, the US Dollar isn’t likely to move much unless an unexpected big catalyst or a major breaking news headline moves the needle.

In the DXY US Dollar Index, the first level on the upside is 103.00, which falls nearly in line with the descending trend line from the top of October 3 and December 8. Once broken and closed above there, the 200-day Simple Moving Average (SMA) at 103.43 comes into play. The 104.00 level might be too far off, with 103.93 (55-day SMA) coming in as the next resistance.

To the downside, the rejection on the descending trendline is giving fuel to the Greenback bears for further downturn. The line in the sand here is 101.74, the floor which held halfway through December before breaking down in the last two weeks. In case the DXY snaps this level, expect to see a test at the low near 100.80.

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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