The US Dollar is hovering near its Monday opening level, reflecting a mixed sentiment in the market. Earlier in the week, concerns about inflation triggered a risk-off reaction, but this sentiment shifted with Thursday’s Retail Sales data showing a significant drop, prompting investors to overlook the previous inflation worries. As a result, the US Dollar Index (DXY) remains flat, awaiting direction with one trading session left in the week.
Investors are closely watching two key data releases on Friday, the Producer Price Index (PPI) and the University of Michigan report, which are expected to shape the Dollar’s trajectory. Market expectations lean towards further easing in price pressures, potentially leading to a softer US Dollar.
In Friday’s economic calendar, the focus is on the PPI report for January, with expectations for a slight increase in both monthly and yearly headline PPI, along with core PPI figures. Additionally, Building Permits and Housing Starts data for January will be released. The University of Michigan’s preliminary Consumer Sentiment Index for February is also anticipated, alongside speeches by US Federal Reserve Board members Michael Barr and Mary Daly.
Equity markets are in positive territory, buoyed by optimism surrounding the potential delay of rate cuts. European equities are up over 0.50%, and US equity futures show mild gains. The CME Group’s FedWatch Tool indicates a high probability of a pause at the upcoming Fed meeting, with minimal expectations for a rate cut.
In the technical analysis of the US Dollar Index, it briefly bounced off the 100-day Simple Moving Average (SMA) on Thursday, surprising many given its recent poor performance. However, pressure could mount further, potentially breaking below the 100-day SMA. Key resistance levels to watch include 105.00 and 105.12, with further upside potential towards 105.88 and 107.20 if inflation measures exceed expectations. Conversely, the 200-day SMA near 103.67 provides a solid support level, with additional support expected from the 55-day SMA near 103.08.
US DOLLAR FAQS
What is the US dollar?
The US Dollar (USD) is the official currency of the United States of America, as well as the ‘de facto’ currency of many other nations where it is used in conjunction with local currencies. According to 2022 figures, it is the world’s most frequently traded currency, accounting for more than 88% of total global foreign exchange turnover, or $6.6 trillion in transactions each day.
Following World War II, the US dollar replaced the British pound as the world’s reserve currency. The US Dollar was backed by gold for the most of its existence until the Bretton Woods Agreement, which ended the Gold Standard in 1971.
How do the Federal Reserve’s choices affect the US dollar?
The Federal Reserve (Fed) determines monetary policy, which has the greatest influence on the value of the US dollar. The Fed has two mandates: to maintain price stability (manage inflation) and to promote full employment. Its major weapon for achieving these two objectives is to alter interest rates.
When prices rise too rapidly and inflation exceeds the Fed’s 2% objective, the Fed will increase interest rates, boosting the USD value. When inflation falls below 2% or the unemployment rate becomes too high, the Fed may decrease interest rates, weighing on the greenback.
What is quantitative easing, and how does it affect the US dollar?
In severe cases, the Federal Reserve may create additional dollars and use quantitative easing. QE is the mechanism by which the Fed significantly boosts the flow of credit in a troubled financial system.
It is a non-standard policy tool used when credit has dried up because banks refuse to lend to one another (for fear of counterparty default). It is a final option when just decreasing interest rates is unlikely to have the desired outcome. It was the Fed’s primary weapon in combating the credit crisis that arose during the Great Financial Crisis in 2008. The Fed prints additional dollars and uses them to purchase US government bonds, mostly from financial firms. QE generally results in a lower US Dollar.
What is Quantitative Tightening, and how does it affect the US dollar?
Quantitative tightening (QT) is the opposite process in which the Federal Reserve ceases purchasing bonds from financial institutions and does not reinvest the principal from maturing bonds in fresh acquisitions. It is typically good for the US dollar.
