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US Dollar place to be as US government shutdown uncertainty spikes

  • The US Dollar broke higher on Tuesday against most currencies in another rate differential push.
  • Tuesday’s US economic docket will feature  housing market data.
  • The US Dollar Index makes a new 10-month high above 106.00.

The US Dollar (USD) pressured nearly every asset class against the floor in another demonstration of Greenback strength on Monday. With US bond yields rising again to new highs, the rate differential is clearly the main driver between the Dollar and other currencies. As stocks are starting to decline, bonds are being sold, questions arise if this is the start of a feared recession and hard landing for the US economy.

Plenty of data to dig in this Tuesday from the US housing sector, where the tighter and higher credit conditions are still awaited to filter in.. The Housing Price Index and Consumer Confidence Index will both likely be market moving for the Greenback. Headlines from Capitol Hill could be a game changer as well as a stopgap bill will be brought to the House floor later onTuesday. 

Daily digest: US Dollar steady

  • The United Auto Workers (UAW) strike welcomes US President Joe Biden this Tuesday in one of their posts in Michigan. The strike enters its twelfth day. 
  • Minneapolis Federal Reserve President Neel Kashkari called for another interest-rate hike this year. Meanwhile, JP Morgan CEO Jamie Dimon has warned that US rates could head to 7%. Later in the day he commented that a soft landing is a 60% probability at the moment.
  • On the economic data front, Tuesday kicked off with the Redbook Index for last week coming in at 3.8% against 3.6% previous.
  • The Housing Price Index for July went from 0.3% to 0.8%. That previous 0.3% for June got revised to 0.4%.
  • New Home Sales for August went from 0.7 million to 0.675 million for the month of August. 
  • The Richmond Fed Manufacturing Index for September popped back into positive territory from -7 to 5. 
  • To close off, Michelle Bowman from the US Federal Reserve Board of Governors is expected to speak at 17:30 GMT.
  • The US Treasury is to auction a 2-year note near 17:00 GMT. 
  • All red across the board in equity markets as investors’ mood soured after news that Evergrande missed an interest payment to foreign investors on Monday. Meanwhile, the stronger US Dollar and the bond sell-off is not helping risk sentiment to recover. 
  • The CME Group FedWatch Tool shows that markets are pricing in a 81.5% chance that the Federal Reserve will keep interest rates unchanged at its meeting in November. The probability for an unchanged stance increased by the day as strikes at auto plants and a US potential government shutdown loom. 
  • The benchmark 10-year US Treasury yield traded as high as 4.54% and takes a small step back from Monday’s peak. 

US Dollar Index technical analysis: Weekly gain for an eleventh time?

The US Dollar pushes the Relative Strength Index (RSI) into overbought territory after its outperformance on Monday. Traders remain focused and worried on the current and possibly persistent rate differential between the US Fed and other main central banks, which might keep the US Dollar stronger for longer. The US Dollar Index (DXY), which tracks the Greenback against a basket of other major currencies, broke above 106.00 and posted a new 10-month high. 

The US Dollar Index opens above 106.00, though the overheated RSI might make it difficult to hold there. Traders that want to hit that new 52-week high need to be aware that a lot of road needs to be covered, towards 114.78. Rather look for 107.19, the high of November 30, 2022,  as the next profit target on the upside. 

On the downside, the recent resistance at 105.88 should be seen as first support. Still, it has just been broken to the upside, so it isn’t likely to be a strong barrier. . Rather look for 105.12 to do the trick and keep the DXY above 105.00.

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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