- The DXY Index trades at 103.50 on Tuesday, seeing mild gains.
- Investors will look for clues on forward guidance on the FOMC minutes to be released at 19:00 GMT.
- US yields are edging lower, limiting the US Dollar’s upward potential.
In Tuesday’s session, the US Dollar Index trades with mild gains around the 103.50 area as investors brace for the November Federal Open Market Committee (FOMC) minutes. Markes will look for clues to model their expectations for the next Federal Reserve (Fed) moves.
Recently, the US economy has shown indications of cooling inflation and a slowing labor market, leading to a positive response from markets in anticipation as they now are confident that the Fed won’t hike any more, significantly weakening the US Dollar and Treasury yields.
Daily Digest Market Movers: US Dollar awaits catalyst to define trajectory
- The US Dollar DXY Index trades neutrally at around 103.50.
- The 2, 5 and 10-year rates decreased to 4.86%, 4.41% and 4.41%, respectively, which limit the Greenback’s upside.
- Markets will seek any clue on the stance of the FOMC on inflation in the November minutes to place their bets on the next Fed meetings.
- In the meantime, according to the CME FedWatch Tool, investors have already priced in a no hike in December and are betting on rate cuts sooner than expected in May 2024. A sizable minority is even betting on a rate cut in March.
- The US will release October’s Durable Goods data on Wednesday and November’s S&P Global PMIs on Friday.
Technical Analysis: US Dollar bears take a break, RSI still near 30
On the daily chart, the Relative Strength Index (RSI) stands flat near the oversold threshold, while the Moving Average Convergence Divergence (MACD) lays out flat red bars. Both indicators point to the bears taking a slight break ahead of the Thanksgiving holiday.
On the broader scale, the index is below the 20, 100 and 200-day Simple Moving Averages (SMAs), suggesting that sellers are still in charge of the broader scale.
Support levels: 103.30, 103.15, 103.00.
Resistance levels: 103.60 (200-day SMA), 104.20 (100-day SMA),104.50.
US Dollar FAQs
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.
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.
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.
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.