US Dollar hits lowest level in four months as markets shrug off upbeat macro data
Most Recent Article: US Dollar plunges multi-month lows amid dovish Fed
- The US Dollar continues in the red after Wednesday’s sell-off.
- Traders see different central banks remaining hawkish versus a rather dovish Fed.
- The US Dollar Index breaks below 102 and enters danger zone that could see 100.
The US Dollar (USD) enters a second day with a very harsh correction that started Wednesday during the speech from US Federal Reserve (Fed) Chairman Jerome Powell. Markets disregarded all the remarks on the possibility of more hikes when needed and the freedom the Fed gives itself to react any way it sees fit to get inflation down to 2%. All that mattered was that the dot plot projections showed a consensus of interest-rate cuts in 2024.
Meanwhile, stronger Retail Sales and still tight Jobless Claims were a mere drop on a hot plate against the massive fire power from other central banks that came out today. The Swiss National Bank (SNB), the Bank of England (BoE) and even the European Central Bank (ECB) were all eagerly hawkish and not revising their stance while inflation goes lower. During the ECB press conference, ECB's Lagarde even said that rate cuts have not been discussed and are not on the table, wich is a 180 degree divergence from the Fed where rate cuts are foreseen and announced for 2024.
Daily digest: Traders ignore data
- Amidst all the headlines and comments from the vast amount of central banks in the past 24 hours, it appears that traders are ignoring the fact that US economic data is still growing while European economic data has been contracting already for a few months. In that sense having the Fed committing to rate cuts while the ECB rejects any idea of cuts in 2024 might drive economic numbers in the coming months into further divergence between the two blocs.
- A very big batch of US economic data got released at 13:30 GMT:
- The monthly Import Price Index went from -0.6% in October to -0.4% in November.
- The monthly Export Price Index remained stable at -0.9%.
- Initial Jobless Claims fell from 221,000 to 202,000. The Continuing Claims went from 1.856 million to 1.876 million.
- Retail Sales for November ticked up substantially from -0.2% to 0.3%. Retail Sales without cars and transportation went from 0% to 0.2%.
- A big slew of Central Banks are taking the stage as well:
- The Swiss Central Bank (SNB) kept its rate unchanged at 1.75%.
- The Norwegian Central Bank (Norges Bank) hiked 25 basis points, from 4.25% to 4.50%. This triggered a substantial appreciation for the Norwegian Krone against the Greenback of 2.80% (USD/NOK) at time of writing.
- The Bank of England kept its benchmark rate unchanged at 5.25%. The vote split was 6 in favor of a hold and 3 members voting for a 25 basis point hike. Pound Sterling rallies near 1% against the Greenback at time of writing.
- The European Central Bank (ECB) kept its interest rate unchanged at 4%. Inflation forecasts got cut by a few points. The Euro gains 1.0% against the Greenback (EUR/USD) at the time of writing after ECB's Lagarde surprises markets by telling markets that rate cuts are not foreseen for 2024 and were certainly not discussed this meeting.
- With that surprise comment from ECB's Lagarde, all European gains are evaporating. US futures are slightly in the green after the opening bell.
- The CME Group’s FedWatch Tool shows that markets are pricing in a 79.3% chance that the Federal Reserve will keep interest rates unchanged at its January 31 meeting. Around 20.7% expect the first cut already to take place.
- The benchmark 10-year US Treasury Note trades near 3.95%, a substantial leg lower as markets fully price in several cuts for 2024.
US Dollar Index technical analysis: DXY nears oversold regime
The US Dollar has had a firm bill to pay on Wednesday evening in the aftermath of the last Fed rate decision for 2023. The dot plot showed cuts for 2024, though that should not be anything new for traders as the Fed futures already pointed to cuts for 2024 back in the summer. With several other central banks ready to issue their dovish announcements and rate cut predictions for 2024, it is just a matter of time before markets adjust their bets favouring the US Dollar. In the rate differential, the US Dollar is still a strong yielder, and the Greenback could see ample investor inflow again, making the US Dollar Index (DXY) jump higher again.
The DXY US Dollar Index could still resurge to more average levels seen recently. First level to recover is 103.00 as a big figure. Next up, 103.52 – near the 200-day Simple Moving Average (SMA) – is the ideal candidate to head next. From there, 104.00 and 104.60 (100-day SMA) are the levels to watch.
To the downside, the field is open for more downturn. The only level standing in the way for the DXY to head to 101.00 is the low of November near 102.46. Once broken, a big area opens up towards 101.00, with 102.00 briefly holding for support.
(This story was corrected on December 14 at 15:57 GMT to say that US Dollar hit its lowest level in four months, not in three months).
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
FXStreet
Filip Lagaart is a former sales/trader with over 15 years of financial markets expertise under its belt.
