US Dollar eases from two-week highs after FOMC minutes
- The DXY Index sees strong gains and recovers above the 20-day SMA.
- US JOLTs Jobs Openings from November came in below expectations, while ISM’s December Manufacturing PMI came in higher than anticipated.
- FOMC minutes showed that members warned about higher rates for a longer period.
The US Dollar (USD) Index trades with noteworthy gains at 102.50, having successfully reclaimed the 20-day Simple Moving Average (SMA) after hitting its highest level of around 102.60 since mid-December. This comes after the dovish bets on the Federal Reserve (Fed) eased somewhat following the release of the Institute Supply Management (ISM) Manufacturing PMI for December and the JOLTs Job Openings data for November. Hawkish Federal Open Market Committee (FOMC) minutes from the December meeting favored the Greenback to hold its momentum.
The Fed's dovish stance in its last 2023 meeting, welcoming cooling inflation and dismissing rate hikes in 2024, was positively received by markets that dumped the US Dollar in the last session. However, despite investors anticipating high odds of rate cuts in March and May 2023, incoming data could modify these expectations and focus shifts to December labor reports.
Daily digest market movers: US Dollar holds momentum after FOMC minutes, ISM PMIs
- The ISM's Manufacturing PMI for December climbed to 47.4, slightly above the consensus of 47.1.
- JOLTs Job Openings reported by the U.S Bureau of Labor Statistics came in at 8.75M, below the expected 8.85M.
- Market participants are eagerly awaiting reports such as US Nonfarm Payrolls, Average Hourly Earnings, Unemployment Rate, and the Automatic Data Processing Inc. (ADP) Employment Change from December to continue placing their bets on the Fed.
- The Federal Open Market Committee (FOMC) minutes saw the policymakers acknowledging that the policy rate might be reaching its peak but considering keeping rates at restrictive levels for a longer period. Regarding protections, all members see cuts by the end of 2024.
- Market speculation, as inferred from the CME FedWatch Tool, suggests that the odds of rate cuts in March and May have eased but are still high. A hold in January is priced in.
Technical Analysis: DXY index short-term indicators gain traction, outlook still fragile
The Relative Strength Index (RSI), with its position in positive territory and positive slope, indicates a strengthening buying momentum in the DXY, showing that buyers may continue pushing up the currency index price. This is reinforced by the rising green bars of the Moving Average Convergence Divergence (MACD), which suggest a shift towards bullish territory.
However, the picture isn't entirely optimistic, as seen in the Simple Moving Averages (SMAs). The index's position above the 20-day SMA underscores the short-term buying momentum, but its position below the 100 and 200-day SMAs serves as a reminder of the sustained selling strength that continues to prevail on broader time frames. This suggests a bearish undercurrent that may need to gain more momentum before the situation could tip in favor of sellers.
Support levels: 102.40 (20-day SMA),102.00, 101.50.
Resistance levels: 102.70, 102.90, 103.00.
Canadian Dollar FAQs
What key factors drive the Canadian Dollar?
The key factors driving the Canadian Dollar (CAD) are the level of interest rates set by the Bank of Canada (BoC), the price of Oil, Canada’s largest export, the health of its economy, inflation and the Trade Balance, which is the difference between the value of Canada’s exports versus its imports. Other factors include market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – with risk-on being CAD-positive. As its largest trading partner, the health of the US economy is also a key factor influencing the Canadian Dollar.
How do the decisions of the Bank of Canada impact the Canadian Dollar?
The Bank of Canada (BoC) has a significant influence on the Canadian Dollar by setting the level of interest rates that banks can lend to one another. This influences the level of interest rates for everyone. The main goal of the BoC is to maintain inflation at 1-3% by adjusting interest rates up or down. Relatively higher interest rates tend to be positive for the CAD. The Bank of Canada can also use quantitative easing and tightening to influence credit conditions, with the former CAD-negative and the latter CAD-positive.
How does the price of Oil impact the Canadian Dollar?
The price of Oil is a key factor impacting the value of the Canadian Dollar. Petroleum is Canada’s biggest export, so Oil price tends to have an immediate impact on the CAD value. Generally, if Oil price rises CAD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Oil falls. Higher Oil prices also tend to result in a greater likelihood of a positive Trade Balance, which is also supportive of the CAD.
How does inflation data impact the value of the Canadian Dollar?
While inflation had always traditionally been thought of as a negative factor for a currency since it lowers the value of money, the opposite has actually been the case in modern times with the relaxation of cross-border capital controls. Higher inflation tends to lead central banks to put up interest rates which attracts more capital inflows from global investors seeking a lucrative place to keep their money. This increases demand for the local currency, which in Canada’s case is the Canadian Dollar.
How does economic data influence the value of the Canadian Dollar?
Macroeconomic data releases gauge the health of the economy and can have an impact on the Canadian Dollar. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the CAD. A strong economy is good for the Canadian Dollar. Not only does it attract more foreign investment but it may encourage the Bank of Canada to put up interest rates, leading to a stronger currency. If economic data is weak, however, the CAD is likely to fall.
Author
Patricio Martín
FXStreet
Patricio is an economist from Argentina passionate about global finance and understanding the daily movements of the markets.
