- The Greenback trades in the green against all major currencies.
- US traders on the lookout for US Jobless Claims and Personal Consumption Expenditure Price Index numbers.
- The US Dollar Index climbs above 103 and could still flip this week’s overall performance into positive territory.
The US Dollar (USD) bulls are back, alive and kicking, as the Greenback is soaring on Thursday. The surprise revival comes on the back of a sudden meltdown in the Euro and other major pairs. Strong activity data in the US, coupled with lower-than-expected inflation figures in the Eurozone, are quickly shifting traders’ bets. Investors are pricing in a quick rate cut from the European Central Bank (ECB), whereas the interest rate differential between the US Dollar and the Euro got very tight at the beginning of the week.
On the economic front, traders already revised their earlier selling moves in the Greenback after the US Gross Domestic Product (GDP) numbers revealed the US economy performed strongly in the third quarter, despite headwinds from the elevated-rates-regime. More guidance to come from the US data on Thursday with the US Jobless Claims and Personal Consumption Expenditures (PCE) Price Index numbers, which are the Federal Reserve’s preferred inflation gauge. Any further decline in the index will be welcome, though a steady and marginal decline could still support a stronger US Dollar.
Daily digest: Fed will be watching
- At 13:30 GMT, this Thursday a big batch of data points is to be released:
- US Initial Jobless Claims are expected to head from 209,000 to 220,000.
- Continuing Jobless Claims were at 1,840,000 and are expected to head to 1,865,000.
- Monthly Headline Personal Consumption Expenditures Price Index for October is expected to decline from 0.4% to 0.1%.
- Headline Personal Consumption Expenditures Price Index on a yearly basis is expected to head from 3.4% to 3%.
- Monthly Core Personal Consumption Expenditures Price Index for October is expected to slow from 0.3% to 0.2%.
- Core Personal Consumption Expenditures Price Index on a yearly basis is forecast to head from 3.7% to 3.5%.
- Personal Income for October is seen declining from 0.7% to 0.2%.
- Personal Spending for October is set to decline alongside the Personal Income, from 0.7% to 0.2%.
- Near 14:05, New York Fed President John Williams will speak.
- The Chicago Purchasing Managers Index is due, staying in contraction from 44 to 45.4.
- At 15:00, the Pending Home Sales index will come out for October, with the monthly performance shrinking from 1.1% to -2%, while the yearly performance is expected to head from -11% to -8.8%.
- Right at the end of this Thursday, the US Treasury is heading to markets to allocate a 4-week bill.
- Equities are on track to print one of the best performing November in a long time. After a few days of hesitation, indices across the globe are in the green with all Asian major indices increasing near 0.50%. European equities are marginally in profit, while US Futures are rather in line with Asian profits, near 0.50%.
- The CME Group’s FedWatch Tool shows that markets are pricing in a 95.8% chance that the Federal Reserve will keep interest rates unchanged at its meeting in December.
- The benchmark 10-year US Treasury Note trades at 4.29%, and is finding a floor after the earlier decline this week.
US Dollar Index technical analysis: losing the elastic band
The US Dollar has been stretched long and far enough in its devaluation – like an elastic band. Earlier this week the Relative Strength Index (RSI) was indicating that the elastic band was overstretched to the downside after entering oversold, and some unwinding was granted. The unwinding is starting to take place and could still put this weekly performance of the US Dollar Index (DXY) in the green if the current trend continues into Friday’s US close.
The DXY is making its way up towards the 200-day Simple Moving Average (SMA), which is near 103.59. The DXY could still make it back up there, should US traders come back in the market and start buying the current dip. A two-tiered pattern of a daily close lower followed by an opening higher would quickly see the DXY back above 104.28, with the 200-day and 100-day SMA turned over to support levels.
To the downside, historic levels from August are coming into play, when the Greenback summer rally took place. The lows of June make sense to look for some support, near 101.92, just below 102. Should more events take place that initiate further declines in US rates, expect to see a near full unwind of the 2023 summer rally, heading to 100.82, followed by 100.00 and 99.41.
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.
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