- The Greenback opens higher this Friday and fails to hold on to gains.
- Traders can let the dust settle in a very light calendar ahead of the festivities next week.
- The US Dollar Index is steady above 104, though faces some pressure towards the weekend.
The US Dollar (USD) has given traders and markets a run for their money in this very volatile and nervous trading week. The main takeaway – and probably the main topic next week around the dinner table at Thanksgiving – will be the question of whether the US Federal Reserve is now truly done with hiking for the time being. Traders will get the chance to put all the pieces of the puzzle in place. The Greenback could possibly regain some strength, as this week’s move looks a bit overdone.
The calendar this Friday is a very slim one, with only housing data and building permits foreseen. Do not expect any big waves. The two actions that will probably guide the markets are a reduction of positions ahead of the weekend and some paring back of incurred losses in overdone and overstretched moves from earlier this week, in all asset classes.
Daily digest: US Dollar eases further
- Expect some mild volatility near 13:30 GMT, when the sole data points for this Friday will be released:
- Monthly Building Permits for October are expected to head from 1.471 million to 1.450 million.
- Housing Starts for October is expected to head from 1.358 million to 1.350 million.
- Traders will try to assess this week’s data going into the year-end with the question of whether there is a medium-term goldilocks scenario, in which the Fed will cut quicker than expected (expectations now are for earliest June/July 2024). Or, alternatively, if there will be a recession in which economic growth gets slashed, jobless claims soar and more pain must be endured by the economy before the Fed steps in and starts cutting rates to provide ample oxygen for the US economy to recover.
- Equities are very mixed this Friday after a downbeat day across the board on Thursday. The Japanese indices are closing this Friday in the green, while the Chinese Hang Seng is down over 2%. European equities are slightly in the green while the UK FTSE100 is down over 1%. US equity futures are flat ahead of the US open.
- The CME Group’s FedWatch Tool shows that markets are pricing in a 99.8% chance –up from 85.7% on Tuesday morning – that the Federal Reserve will keep interest rates unchanged at its meeting in December.
- The benchmark 10-year US Treasury Note yield trades at 4.40%, flirting with the lowest level for this week.
US Dollar Index technical analysis: US Dollar attempts to bounce higher are failing
The US Dollar is trying to continue its recovery from Tuesday’s meltdown. The recovery is not going as speedily as hoped, however, as only baby steps are visible in the US Dollar Index (DXY). It looks like traders have been unwinding their US Dollar long positions and only a substantial catalyst in favour of the Greenback will help to bring the DXY back to 105 and higher.
The DXY was able to bounce off the 100-day Simple Moving Average (SMA) in the late 103s. Now expect to see follow through from there, with 105.29, the low of November 6, as the market level where the DXY should try to close above this week. From there, the 55-day SMA at 105.71 is the next price point on the topside that needs to be reclaimed by US Dollar bulls before starting to think of more US Dollar strength to come into play.
Traders were warned that when the US Dollar Index would slide below that 55-day SMA, a big air pocket was opening up that could see the DXY fall substantially. This materialised on Tuesday. For now the 100-day SMA is trying to hold, at 103.62, although the 200-day SMA is a much better candidate for support. Should that level even be broken substantially, a long term sell-off could get underway with the DXY falling between 101.00 and 100.00.
Fed FAQs
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.
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.
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.
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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