US Dollar hits one-month high with Trump set to win GOP nomination after first Caucus

  • The US Dollar trades in the green across the board on Tuesday with US markets set to open this week.
  • Traders are buying into the Greenback after Trump claims victory in Iowa.
  • The US Dollar Index jumps to 103 and snaps out of the technical selling area.

The US Dollar (USD) is squeezing out Greenback bears with its move on the outcome of the first Caucus election for the Republican Party (GOP) candidate who will pick up the gloves against Joe Biden in the presidential runoff later this year. Former US President Donald Trump won with a clear landslide victory of nearly 51%. Iowa bears a lot of importance because in the past, Trump was not able to win the state’s support in previous Caususses. 

This result could mean that Trump could book further landslide wins in other states where he already has enough votes and supporters to become the only main candidate for the GOP. Meanwhile on the calendar front, traders are bracing for a speech from US Federal Reserve member of the Board of Directors Christopher Waller, due later this Tuesday. His dovish comments in November moved the markets substantially, triggering substantial US Dollar weakness throughout December. 

Daily digest market movers: US elections high on the agenda

  • The US is carrying out fresh strikes against Houthi rebels in Yemen after a Greece ship was hit by a missile in the Red Sea earlier this Tuesday.
  • Former US President Donald Trump wins Iowa Caucus with a 51% lead. This big win in the first and one of the more crucial states, could already confirm Trump as GOP candidate for the US presidential elections.
  • The World Economic Forum in Davos is entering its second day with a lot of headline risk from senior people – central bankers and leaders – making comments, statements and holding interviews. 
  • It is a very light US calendar, with the New York Empire State Manufacturing Index out already ahead of the US opening bell. The Index went from -14.5 to -43.7, a big miss on estimates.
  • The US Treasury is heading to the short-term funding part of the market to allocate a 3-month and a 6-month bill tender near 15:30. 
  • Right at the end of this Tuesday, US Fed’s Waller is due to speak near 16:00. Should he turn hawkish and push back on his earlier statement from November, that could mean more gains for the US Dollar. 
  • Equity markets are in a bad mood and are selling off with the Hong Kong Hang Seng Index dropping over 2%. European equities are down near 0.5% while US futures are paring back some earlier losses, though still in the red by 0.5%.
  • The CME Group’s FedWatch Tool shows that markets are pricing in a 95.3% chance that the Federal Reserve will keep interest rates unchanged at its January 31 meeting. Around 4.7% expect the first cut already to take place. The return to 95.3% unchanged fits with the US yield jumping a few basis points higher. 
  • The benchmark 10-year US Treasury Note jumps to 4.01% with Bond trading coming online again in Asia on Tuesday morning. 

US Dollar Index Technical Analysis: US Dollar bulls wake up 

The US Dollar Index (DXY) pops out of the selling pressure and suddenly has the road wide open for more upside. The jump comes on the back of headlines that confirmed Donald Trump as the big winner in Iowa in the first Caucus election for the Republican Party. The move comes as this is a crucial state where Trump in the past was unable to win, and could mean that other Primaries are becoming redundant with the US gearing up for a Trump-Biden election battle for the White House seat in November. 

With the descending trend line being firmly broken, a short squeeze could get underway with the DXY running up higher and squeezing out the traders who sold the Greenback alongside the descending trend line from October 2023. Even 102.90 got broken and offers a window of opportunity to head to 103.44 and 103.49, where the 55-day and the 200-day Simple Moving Averages (SMA) are residing respectively. Should even those get broken later this week, expect to see a stretched rally up to 104.44 towards the 100-day SMA. 

In case a turnaround unfolds, expect a drop back to the descending trend line near 102.67. Should the US Dollar reenter below that descending trend line, expect to see a quick sell-off towards 102.00 first and next 101.00 before testing the low near 100.82.

Dot Plot FAQs

What is the Federal Reserve “Dot Plot”?

The “Dot Plot” is the popular name of the interest-rate projections by the Federal Open Market Committee (FOMC) of the US Federal Reserve (Fed), which implements monetary policy. These are published in the Summary of Economic Projections, a report in which FOMC members also release their individual projections on economic growth, the unemployment rate and inflation for the current year and the next few ones. The document consists of a chart plotting interest-rate projections, with each FOMC member’s forecast represented by a dot. The Fed also adds a table summarizing the range of forecasts and the median for each indicator. This makes it easier for market participants to see how policymakers expect the US economy to perform in the near, medium and long term.

When does the Federal Reserve publish the “Dot Plot”?

The US Federal Reserve publishes the “Dot Plot” once every other meeting, or in four of the eight yearly scheduled meetings. The Summary of Economic Projections report is published along with the monetary policy decision.

Why is the “Dot Plot” important for markets?

The “Dot Plot” gives a comprehensive insight into the expectations from Federal Reserve (Fed) policymakers. As projections reflect each official’s projection for interest rates at the end of each year, it is considered a key forward-looking indicator. By looking at the “Dot Plot” and comparing the data to current interest-rate levels, market participants can see where policymakers expect rates to head to and the overall direction of monetary policy. As projections are released quarterly, the “Dot Plot” is widely used as a guide to figure out the terminal rate and the possible timing of a policy pivot.

How does data in the “Dot Plot” affect the US Dollar?

The most market-moving data in the “Dot Plot” is the projection of the federal funds rate. Any change compared with previous projections is likely to influence the US Dollar (USD) valuation. Generally, if the “Dot Plot” shows that policymakers expect higher interest rates in the near term, this tends to be bullish for USD. Likewise, if projections point to lower rates ahead, the USD is likely to weaken.

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