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US Dollar steady at 104 as Fed speakers turn less cheerfull on recent inflation dive

  • The Greenback opens higher this Friday though 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) gave 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 immune for Fed speakers

  • Thee sole data points for this Friday were housing data numbers:
    1. Monthly Building Permits for October went from 1.471 million to 1.487 million.
    2. Housing Starts for October went from 1.346 million to 1.372 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. 
  • Some US Federal Reserve speakers are taking the stage late this Friday:
    1. Fed's Mary Daly from the San Francisco Fed said she is not sure if inflation is on track for 2%.
    2. Michael Barr, the Fed's Vice Chairman, said the Fed is very cautious on overinterpreting any data points and that the Fed is near its interest-rate peak. 
    3. Susan Collins from the Boston Fed said that the latest inflation data was promising news. 
  • 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 up nearly 1% with US equities still flat for this Friday's session. 
  • 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 4.44%.

US Dollar Index technical analysis: Fed speakers unable to turn tide in DXY

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

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.

Author

Filip Lagaart

Filip Lagaart is a former sales/trader with over 15 years of financial markets expertise under its belt.

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