US Dollar struggles to stay afloat with US yields surpassing pain threshold
- The Greenback slid lower last week despite steady safe-haven demand.
- Geopolitics and a very packed data calendar will be the driving force for the US Dollar this week.
- The US Dollar Index closed out its week in the red, going nowhere in October.
The US Dollar (USD) is seeing headwinds getting bigger by the week, as it looks that its months-long rally has officially halted. With US yields soaring above 5% in the 10-year benchmark rate, questions are arising if a recession is at hand and if the US economy can cope with these elevated rates. From a pure technical point of view, the weekly chart of the US Dollar Index (DXY) shows that the US Dollar Index has been trading sideways for the last three weeks and is losing elements to trade higher.
On the economic data front, traders will have a light Monday ahead of other data points later this week. The focal point will be on Thursday, when the US Gross Domestic Product (GDP) numbers for the third quarter are due to come out. On Friday, the Federal Reserve preferred inflation gauge will be published: the Personal Consumption Expenditures Price Index.
Daily digest: US Dollar not in favor of higher rates
- EU leaders have issued a joint statement calling for a long pause on the Israeli ground offensive.
- The delay of the Israeli ground offensive is holding markets in a choke hold as investors could see a risk premium being factored in for yet a proxy war to develop.
- One data point for this Monday: the Chicago Fed National Activity Index for September. Previous print was at -0.16 and now came in at 0.02.
- The US Treasury is heading to the markets again with a 3-month and a 6-month bill auction at 15:30 GMT.
- Equities are starting the week in the red. Asian indexes fall by near 1% and European equities are down around 0.50%. US equity futures are looking for direction ahead of a new week of earnings.
- The CME Group’s FedWatch Tool shows that markets are pricing in a 98.4% chance that the Federal Reserve will keep interest rates unchanged at its meeting in November.
- The benchmark 10-year US Treasury yield trades at 4.91%, and briefly broke above 5.05%, the multi-year high. The bond market is still stuck in a sellers market, where higher yields are demanded before buying US bonds.
US Dollar Index technical analysis: 106 under pressure
The US Dollar dropped the ball last week and closed in the red, proving to the second-guessers that the DXY summer rally is behind us. For October, the Greenback has not really moved that much and despite geopolitical tensions, more convictions are starting to build in the market that the US Dollar might rather go down. All eyes will be on the 106.00 level, which could start to see substantial breakthroughs to the downside if US economic data start to deteriorate.
Should the DXY want to deliver a bullish signal, at least the high of last week at 106.67 needs to be broken. Preferably a re-enter above the summer rally trend line would support further upside moves. On the topside, 107.19 is an important level to reach. If this is the case, 109.30 is the next level to watch.
On the downside, the recent resistance at 105.88 did not do a good job supporting any downturn. Instead, look for 105.12 to keep the DXY above 105.00. If that fails to do the trick, 104.33 will be the best level to look for resurgence in US Dollar strength, as it aligns with the 55-day Simple Moving Average (SMA) as a support level.
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
FXStreet
Filip Lagaart is a former sales/trader with over 15 years of financial markets expertise under its belt.
