- Traders sell precious metals with Copper, Gold, Silver plunging to yearly lows.
- Focal point this week is US Nonfarm Payrolls on Friday.
- US Dollar Index breaks above 107 and prints 11-month high.
The US Dollar (USD) is creating a blood bath amongst several asset classes: precious metals sink to yearly lows while bond traders are still witnessing high Treasury yields and equities are turning red on their yearly performance. King Dollar is not going away any time soon as US Federal Reserve Chairman Jerome Powell on Monday evening communicated to the markets that the central bank will advance with careful decisions on rates and that rates will remain elevated to get inflation down to 2%.
It thus does not seem that this rate differential story will go away anytime soon, unless something fundamental happens. After the recent Institute of Supply Management (ISM) numbers, it becomes clear that the US economy is still withstanding these elevated rates. Focus this Tuesday will be on the JOLTS job posting numbers to see if there is a slowdown in labor demand, which could tip the scale in the coming months.
Daily digest: US Dollar looks invincible
- The lighter data calendar for this Tuesday kicked off with the weekly Redbook Index. Previous print was 3.8% and comes in at 3.5% for the last week of September.
- the JOLTS job openings report is surging against all odds. From 8,827,000 to 9,610,00, beating estimations and surging to the highest level since July 2021.
- The US Treasury will hit the markets again and needs to place a 52-week bill at these elevated levels.
- Equities are not dealing well with this stronger Greenback and are sinking lower. Several equities indices are trading in the red for the year: In Asia, markets are red across the board with the Nikkei and Topix indices sinking more than 1%. The Hang Seng is down over 2%. European equities plunging lower as well with the US session nearing, down over 1% while US equity futures are taking a turn for the worse as well.
- The CME Group FedWatch Tool shows that markets are pricing in a 74.3% chance that the Federal Reserve will keep interest rates unchanged at its meeting in November.
- The benchmark 10-year US Treasury yield is lower at 4.75% printing a new high yet again for the year. The rate differential story is back as a driving force in the US bond market.
US Dollar Index technical analysis: Unbeatable
The US Dollar Index is on track to become the trade of the year. WIth several equity indices trading in the red for their performance in 2023, and precious metals hitting several floors. The US Dollar seems to be the only place to get a solid return, together with Crude oil prices. The importance of the US data will become even more important in order to time when this US Dollar cycle will come to an end.
The US Dollar Index opened around 107.21, though the overheated Relative Strength Index (RSI) is acting up again and heading back into an overbought regime. With 107.19 – the high of November 30, 2022 – being tested as we speak, it will be important to see if it can get a daily close. If that is the case, 109.30 is the next level to watch.
On the downside, the recent resistance at 105.88 should be seen as first support. Still, that barrier has just been broken to the upside, so it isn’t likely to be strong. Instead, look for 105.12 to do the trick and keep the DXY above 105.00.
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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