Created
: 2024.04.24
2024.04.24 19:42
The US Dollar (USD) is trying to recover on Wednesday after trading firmly in the red on Tuesday. The miss on the US Purchasing Managers Index (PMI) for both the Services and Manufacturing sectors triggered a sell-off which extended to Wednesday's Asian trading session. With the start of the European session, the dust seems to settle and seem to be considering the data miss as a one-off. Going forward, the US Gross Domestic Product (GDP) data on Thursday and the US Personal Consumption Expenditures (PCE) Price Index release on Friday will drive the next moves for the US Dollar.
On the economic data front, Wednesday's calendar is relatively light but some data could be moving markets and the DXY US Dollar Index again. Durable Goods Orders data are due to be released, and after the PMIs disappointment, more downbeat numbers could extend doubts over the US exceptionalism. Depending on how far data would undershoot or deteriorate, a June cut might even be back on the table again by next week.
The US Dollar Index's (DXY) recent rally broadly comes from the staggering US economy, which has been relentlessly printing positive economic numbers. Tuesday's PMI numbers came in below estimates for the first time since last year, but investors seem to be taking this miss as a one-off rather than a sudden shock. Markets will want to await further confirmation in the data points from this week and possibly even next week before heading back to pricing in a rate cut for June.
On the upside, first 105.88 (a pivotal level since March 2023) needs to be recovered again before targeting the high of April 16 at 106.52. Further up and above the 107.00 round level, the DXY Index could meet resistance at 107.35, the October 3 high.
On the downside, 105.12 and 104.60 should also act as support ahead of the 55-day and the 200-day Simple Moving Averages (SMAs) at 104.35 and 104.05, respectively. If those two are unable to catch the falling knife price action, the 100-day SMA near 103.70 is the next best candidate.
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.
Created
: 2024.04.24
Last updated
: 2024.04.24
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