US Dollar steady in the green with markets mulling EU-US trade talks and risk sentiment
- The US Dollar holds good cards to close off this Tuesday in positive territory, snapping the DXY's losing streak.
- Fed officials keep pointing to tariff and trade uncertainty, while keeping rates steady.
- The US Dollar Index heads above 99.00 in search of the 100.00 figure.
The US Dollar Index (DXY), which tracks the performance of the Greenback’s value against six major currencies, is tying up some minor gains, trading around 99.25 at the time of writing this Tuesday. The recovery started in early Tuesday trading with the Japanese Ministry of Finance (MoF) commenting that its bond issuance plan might see some tweaking, with lower volumes. This made Japanese yields collapse and saw the Japanese Yen (JPY) devalue against the Greenback, with a domino effect in favor of the US Dollar against several major currencies.
Meanwhile the Federal Reserve (Fed) has come out with comments from Minneapolis Fed Chairman Neel Kashkari, who commented that rates will remain steady until tariff clarity takes place. Fed's Kashkari also pointed out that there are no quick wins in trade talks, and that these talks can take months or years to be concluded.
While markets are hopeful about a US-EU trade deal in the upcoming days, this week will start with US data due this Tuesday, after the Memorial Day public holiday, which kept markets closed. Traders can look ahead to the US Durable Goods Orders for April and the Dallas Federal Reserve (Fed) Manufacturing Business Index for May, which is a good leading indicator to see how the manufacturing sector is holding up after the introduction of tariffs.
Daily digest market movers: Consumer Confidence faces first tariff test
- The US Durable Goods Orders for April have been released. The headline figure saw Orders shrink by only -6.3%, against the feared -7.9%, coming from a revised down 7.6% with the previous reading at 9.2% in March. US Durable Goods Orders without Transportation jumped by 0.2%, beating the expected contraction by -0.1% and up from the revised -0.2% (initial reading 0%) in March.
- At 14:00 GMT, the US Consumer Confidence for May will be released, with no forecast available and the previous figure at 86.0.
- At 14:30 GMT, the Dallas Fed Manufacturing Business Index for May is due. No forecast available, with the previous number falling sharply by -35.8.
- Equities are still holding on to gains at the US opening bell. Europe sees gains just shy of 1%, while US equities are set to rally over 1% at market open.
- The CME FedWatch tool shows the chances of an interest rate cut by the Federal Reserve in June’s meeting are only at a low 2.1%. Further ahead, the July 30 meeting sees odds for rates being lower than current levels at 24.4%.
- The US 10-year yield comes in at 4.47% at the time of writing, another leg lower from the 4.62% peak performance seen last Thursday.
US Dollar Index Technical Analysis: A small attempt to upend the losing streak
The US Dollar Index is due for some recovery after a long stretch of devaluation, and that narrative is picking up this Tuesday after very early signs were seen on Monday. Expect to see the DXY swing back higher and look for firm resistance. That could trigger a firm rejection at higher levels and push the DXY beyond the low of May, causing more devaluation for the Greenback and losses for the DXY.
On the upside, the 100.22 level, which held the DXY back in September-October, is the first resistance, followed by the broken ascending trend line near 100.80. Further up, the 55-day Simple Moving Average (SMA) at 101.32 is the next level to watch out for, followed by 101.90, a pivotal level throughout December 2023 and a base for the inverted Head-and-Shoulders (H&S) formation during the summer of 2024. In case US Dollar bulls push the DXY even higher, the 103.18 pivotal level will come into play.
Should the DXY see some renewed selling pressure, a nosedive move could materialize towards the year-to-date low of 97.91 and the pivotal level of 97.73. Further below, a relatively thin technical support comes in at 96.94 before looking at the lower levels of this new price range. These would be at 95.25 and 94.56, meaning fresh lows not seen since 2022.
US Dollar Index: Daily Chart
Fed FAQs
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.
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.
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.
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.
