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US Dollar jumps to crucial technical levels on Monday

Most Recent Artcile: US dollar strengthens amid sour market mood and rising yields

  • The US Dollar Index steady in the 103-area though a technical rejection looms. 
  • The Greenback booked its third consecutive weekly decline on Friday.
  • US traders are entering the last two weeks of normal trading before the holidays.

The US Dollar (USD) is going all in for risk off this Monday as tensions in the Middle East are creating risk off across the board in equity markets. With a flight to safe havens, yields are soaring in favor of the Greenback, which in it turns sees traders come back and buy the US Dollar. This makes an interesting case going forward, if the US Dollar Index (DXY) might be breaking back above a crucial technical indicator with more strenght ahead. 

On the economic front, a very light calendar is due on Monday, but data will pile up throughout the week up to the main event on Friday: the US Jobs Report, or Nonfarm Payrolls. Expect to see mild moves in the crosses against the Greenback with most traders keeping their powder dry for Friday. Other job-related data like the JOLTS and ADP numbers will also be released this week. 

Daily digest: US session ekes out more gains

  • Several reports emerge out of Gaza where Israeli tanks have been spotted just outside Khan younis. 
  • The spread between US and German bonds is soaring again, after tightening throughout November.
  • At 15:00 GMT,US Factory Orders data for October was released, with a decline from 2.3% to -3.6%. 
  • The US Treasury can benefit from the recent decline in US rates and will be placing a 3-month and a 6-month bill in the markets. 
  • Equities continue to slide in Asia. The Hong Kong Hang Seng Index leads the decline, losing more than 1%. European equities are mildly in the red, while US futures are flat ahead of the start of this trading week. 
  • The CME Group’s FedWatch Tool shows that markets are pricing in a 97.7% chance that the Federal Reserve will keep interest rates unchanged at its meeting next week.  
  • The benchmark 10-year US Treasury Note trades at 4.27%, and steady off this week’s low.

US Dollar Index technical analysis: New US Dollar cycle

The US Dollar trades around 103.31 at the time of writing when gauged by the DXY US Dollar Index. From a technical point of view, the US Dollar is trading near crucial levels.  Although last week the DXY was unable to break back above important technical levels, it appears that a more substantial catalyst is needed to push the DXY back above that crucial 200-day Simple Moving Average (SMA) near 103.58, visible on a daily chart. With the US Jobs Report on Friday, that might be enough for the Greenback to reestablish its status as King Dollar before closing up shop for the holidays. 

The DXY is making its way further up towards the 200-day Simple Moving Average (SMA), which is near 103.58. The DXY could still make it through there should employment data trigger rising US yields again. A two-tiered pattern of a daily close lower followed by an opening higher would quickly see the DXY back above 104.28, with the 200-day and 100-day SMA turned over to support levels. 

To the downside, historic levels from August are coming into play, when the Greenback summer rally took place. The lows of June make sense to look for some support, near 101.92, just below 102.00. Should more events take place that initiate further declines in US rates, expect to see a near-full unwind of the 2023 summer rally, heading to 100.82, followed by 100.00 and 99.41.

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

Filip Lagaart is a former sales/trader with over 15 years of financial markets expertise under its belt.

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