US Dollar trims losses and gains ground on quiet Monday
- DXY Index trades with mild gains around 103.35.
- Key US inflation and economic activity data are due this week .
- Market bets on the Fed cutting rates continue to adjust.
The US Dollar (USD) is currently trading with mild gains at around 103.35 in light of a quiet session ahead of an eventful week.
The US economy remains robust with consistently firm data suggesting potential growth in Q4 and likely stability in Q1 2024. Regarding the Federal Reserve, market expectations have adjusted with the market anticipating approximately 125 basis points (bps) of easing over the course of 2024, compared to nearly 175 bps anticipated earlier that gave the Greenback a lift earlier in January. Core Personal Consumption Expenditures (PCE) may shape the short-term expectations from the Fed and are set to be released on Friday.
Daily Digest Market Movers: US Dollar under mild pressure on quiet session, eyes on PCE and GDP data
- On Thursday, the US will release December Personal Consumption Expenditures (PCE) data, which is expected to show that inflation has stagnated. Gross Domestic Product (GDP) figures from Q4 are also due that day and markets expect the economic activity to have cooled off.
- US Treasury yields are in a downturn with the 2-year yield at 4.37%, the 5-year yield at 4.02%, and the 10-year yield at 4.10%.
- The CME FedWatch Tool indicates the odds of a rate cut in March have fallen to 50%. No policy changes are expected in next week’s Fed meeting.
Technical Analysis: DXY bullish momentum wanes, fails to hold above 200-day SMA
The Relative Strength Index (RSI) in flat and positive territory hints toward a neutral stance in the current market dynamics, not leaning distinctly toward either buyers or sellers. Paired with the flat green bars of the Moving Average Convergence Divergence (MACD), this suggests a minor bullish momentum waiting in the wings for DXY, especially as it implies a diminishing seller's market.
The positioning of the DXY in relation to the Simple Moving Averages (SMAs) provides a more detailed picture of the market trend. The presence above the 20-day SMA reveals that buyers have basic control in the short term. However, The DXY’s positioning below the 100-day and 200-day SMAs indicates that sellers hold dominance in the long run.
Support levels: 103.20, 103.00, 102.80.
Resistance levels 103.40 (200-day SMA), 103.60, 103.80.
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
Patricio Martín
FXStreet
Patricio is an economist from Argentina passionate about global finance and understanding the daily movements of the markets.
