- The DXY Index trades with a neutral bias near 103.50.
- Wednesday’s FOMC decision and labor market data will play a pivotal role.
- Low tier data including labor, housing and consumer confidence figures came in mixed.
The US Dollar (USD) Index holds steady near 103.50 on Tuesday, showing a neutral posture after the release of low-tier data. The two-day Federal Reserve (Fed) meeting kicked off on Tuesday and ends on Wednesday with a press conference from Fed Chair Jerome Powell. This makes the markets turn cautious, lending some support to the USD.
Market anticipation regarding the Fed’s future decisions are shifting but remain restrained due to robust recent economic data, suggesting that earlier rate cuts are unlikely. The upcoming FOMC decision and jobs data are expected to further steer market sentiment and shape the easing cycle from the Fed.
- According to the US Bureau of Labor Statistics, JOLTs Job Openings for December came in at 9.026M, slightly above the consensus of 8.75M but below November’s 8.925M.
- The Conference Board reported a dip in its Consumer Confidence Index, with a January standing of 114.8 compared to 115 projected and the previous 108.
- The S&P Case-Shiller Home Price for November fell -0.2% MoM against a 0.1% gain in the prior period. On a yearly basis, it had an increase of 5.4%, lower than the expected 5.8% but up from previous 4.9%.
- Market’s perspective on the Federal Reserve’s next move, as gauged by the CME FedWatch Tool, suggest that investors are confident that the bank won’t change its policy on Wednesday. As for now, markets are seeing the easing cycle starting in May.
On the daily chart, the Relative Strength Index (RSI) portrays a slight positive slope within positive territory, indicating steady buying momentum. This, in combination with the green bars represented by the Moving Average Convergence Divergence (MACD), furthers bullish sentiment and suggests an underlying upward price trajectory.
Meanwhile, the placement of the index with respect to the Simple Moving Averages (SMAs) provides additional insights. Remaining above the 20-day SMA confirms a short-term bullish bias. The DXY’s position below the 100-day SMA could introduce occasional pullbacks, yet sustaining above the 200-day SMA demonstrates that the buying pressure overweighs the selling momentum on larger time frames.
Support Levels: 103.45 (200-day SMA),103.30, 103.00.
Resistance Levels: 103.90,104.00,104.20.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022.
Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact 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 when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
