- The Greenback trades choppy on Tuesday ahead of the release of the FOMC Minutes.
- Traders are opting for risk-on bets, undermining safe havens like the Swiss Franc and the US Dollar.
- The US Dollar Index falls to around 103.00, with risks of more downturn to come.
The US Dollar (USD) turns a touch calmer after a few volatile headlines on macroeconomics, ahead of the Fed's recent Minutes publication. The Greenback is down over 0.50% against the Japanese Yen (JPY) and the Chinese Renminbi (CNY) as the overall risk sentiment looks to be in favour of risk-on investment, with equities soaring and safe havens abating, adding to the depreciation call for the Greenback.
The calendar for this Tuesday is picking up pace, with one main event right at the end of the day: the FOMC Minutes from the latest Federal Reserve (Fed) meeting in November, when the central bank opted to leave interest rates unchanged. Traders and analysts will look for clues and side remarks on whether inflation is coming down quickly enough for the Fed to end its hiking cycle and either stay steady or enter a cutting cycle immediately thereafter. On Monday, the Chicago Mercantile Exchange (CME) Fed Fund futures, a tool that gauges market expectation of potential changes to the Fed funds rate, briefly priced in a small possibility of already a rate cut at the upcoming December meeting.
Daily digest: Fed Minutes main event
- Tuesday’s economic calendar took off at 13:30 GMT, with the Chicago Fed National Activity Index release for October. Previous reading was at 0.02 and now came in at -0.49.
- At 13:55 GMT, the Redbook Index for last weekwas released, and went from 3% to 3.4%
- Existing Home Sales were a bit disappointing as sales dropped from 3.96 million to 3.79 million where 3.90 million was expected. That is a drop of -4.1% against -1.5% expected.
- At18:00 GMT, the US Treasury department will issue a 10-year TIPS auction.
- At 19:00 GMT, the main event for this Tuesday is the publication of the Fed’s latest FOMC Minutes.
- Equities are flat and looking for direction as Asian markets are not taking over the risk on sentiment that came from the US on Monday. Markets are bracing for the Nvidia earnings, which will come out after the US closing bell.
- The CME Group’s FedWatch Tool shows that markets are pricing in a 100% chance that the Federal Reserve will keep interest rates unchanged at its meeting in December.
- The benchmark 10-year US Treasury Note yield trades at 4.41%, extending its decline as demand remains present in buying US debt. The 20-year allocation on Monday was a big success with a bid-to-cover ratio of 2.58, above the 2.4 average.
US Dollar Index technical analysis: higher or lower
The US Dollar is sticking to the technical approach after on Monday it breached the 200-day Simple Moving Average (SMA) at 103.62 when gauged by the US Dollar Index (DXY). The Fed FOMC Minutes could briefly provide some support and ease the Relative Strength Index, which is starting to trade in the oversold area on the daily chart. Although relief, do not expect a substantial turnaround as the market broadly anticipated that the Fed is done hiking, at least for now.
The DXY was unable to bounce off the 100-day SMA and is treading further water at the 200-day SMA. Look for the recovery bounce towards the 100-day SMA near 104.20. Should the DXY be able to close and open above it, look for a return to the 55-day SMA near 105.71 with 105.12 ahead of it as resistance.
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. The 200-day SMA is trying to keep everything together, though it is losing its impact quickly. The psychological 100-level comes into play. With a very slim economic calendar and several US market participants off the desk for the holidays, there is room for a potential big downturn this week.
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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