US Dollar unable to bank on Risk Off sentiment with traders rushing into Gold and Bitcoin breaking all time highs

The US Dollar back in the green for this Tuesday in choppy trading.
Markets sees PMI numbers remaining in expantion, despite a small miss on estimate for ISM Services PMI.
The US Dollar Index still orbits around 104.00 and looks for US Primary elections and ECB to move the needle.

The US Dollar (USD) is entering a phase of choppy trading with markets being very dispersed. Markets got a cold shower at the start of this Tuesday at the China’s National People’s Congress where markets were not at all impressed by the stimulus package that has been set forward in order to restore China's growth and economy. This triggered Risk Off across the board and push Gold and Bitcoin to new all-time highs.

On the economic calendar front, The S&P Global Purchase Managers Index (PMI) numbers were upbeat, though the PMI release from the Institute for Supply Management took the wind a bit of the Greenback's sails by coming in under estimates. The deterioration of the Factory Orders did not help neither and pushes the Greenback further in the red.

Tuesday’s economic calendar kicked off with the Redbook Index which jumped from 2.7% to 3.1%.
S&P Global has released its final Purchasing Managers Index numbers for February.
- The preliminary Services index came in at 51.3, with current number at 52.3.
- The Composite PMI was at 51.4, and nudged up to 52.5.
At 15:00 GMT a big slew of data got released:
- The ISM Services data for February:
  - The headline Services PMI went from 53.4 to 52.6, below the expected 53.00.
  - The Services Employment Index shrunk from 50.5 to 48.
- US Factory Orders for January declined far more than the expected 2.9% and came in at -3.6%.
Fed’s Vice Chairman Michael Barr is set to deliver two speeches on Tuesday: one at 17:00 GMT and one at 20:30 GMT.
Equities are disappointed with the light measures that were discussed on the first day of China’s National People’s Congress. Markets were expecting more and are sending nearly all major indices down by 0.50%. All three US equity futures are in the red with Nasdaq down over 1%.
According to the CME Group’s FedWatch Tool, expectations for a Fed pause in the March 20 meeting are at 97%, while chances of a rate cut stand at 3%.
The benchmark 10-year US Treasury Note trades around 4.13%, and is trading at lower level for this week.

US Dollar Index Technical Analysis: Risk Off taking the lead here

The US Dollar Index (DXY) loses its tailwind it received earlier out of the global disappointment around China. The Risk Off flow did not go to the Greenback, and saw traders rather rushing into gold and Bitcoin, both hitting all-time highs. It becomes clear that markets are getting very nervous ahead of the three main events this week with Super Tuesday, the European Central Bank and US Jobs numbers on the docket.

The 100-day Simple Moving Average (SMA) near 103.91 got snapped this Tuesday, where a daily close above would be quite a bullish signal. Should the US Dollar be able to cross above it, 104.60 is het next first target ahead. A firm step beyond there 105.88 comes into reach, the high from November 2023. Ultimately, 107.20 – the high of 2023 – could come back into scope.

Looking down, the 200-day Simple Moving Average at 103.74 has been broken a few times recently, though it has not seen a daily close below it last week, showcasing its importance. The 200-day SMA should not let go that easily, so a small retreat back to that level could be more than granted. Ultimately, should it lose its force, prices could fall to 103.22, the 55-day SMA, before testing 103.00.

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.

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