- The DXY Index is trading neutrally around the 103.80 level with minor day-to-day changes.
- Durable Goods and Confidence data from the US came in weaker than expected.
- The Federal Reserve maintains a hawkish stance as reflected in its reluctance to slash rates, which may limit the downside.
The US Dollar Index (DXY) is currently trading neutrally near the 103.80 mark. The Federal Reserve (Fed) has illustrated its wariness to hastily reduce rates, which has led to a diminished possibility of such cuts in March, while odds in May have decreased to approximately 20%. On the data front, weak mid-tier data reported during the European session is pushing the Greenback down.
If the United States economy continues to show weakness, markets may readjust their expectations, but as for now, the most likely scenario is that the Fed will start cutting in June, which seems to provide support to the USD. Personal Consumption Expenditures (PCE) figures from January and Gross Domestic Product (GDP) revisions from Q4 may change those bets.
- The Conference Board’s Consumer Confidence Index for February dropped lower than anticipated with a 106.7 print against the expected 115.
- US Durable Goods Orders plunged by 6.1% in January, far more than the 4.5% decline expected.
- As per the CME FedWatch Tool, the Federal Reserve’s unwillingness to cut rates prematurely has shifted market sentiment. Reduction odds for March have dropped to zero, with May’s likelihood of a cut down to 20%. As for now, the most likely scenario is that the easing starts in June.
- In case PCE and GDP data come in softer than expected, those odds may change in favor of dovish rhetoric that weighs on the US Dollar.
The technical situation, as indicated by the daily chart, shows buying momentum gradually waning. This is seen by the Relative Strength Index (RSI) remaining tepid in negative territory, suggesting the possible emergence of selling pressure. Adding to this narrative, the appearance of rising red bars in the Moving Average Convergence Divergence (MACD), an indicator of downward momentum, further attests to this perspective.
However, the index standing with regard to the Simple Moving Averages (SMAs) presents a somewhat mixed picture. The DXY remains below both the 20 and 100-day SMAs, indicating a possible bearish bias for the short term, but its position above the 200-day SMA may imply underlying bullish strength.
Furthermore, the evidence of bears gaining ground could amplify the selling pressure. Therefore, in the short term, it could be suggested that the selling momentum is currently dominating. This, however, does not entirely overshadow the overall trend, which still showcases a certain degree of bullish resilience in the DXY.
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.
