- US Dollar consolidates on Friday but tallies a weekly gain
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US Dollar consolidates on Friday but tallies a weekly gain
- The DXY index trades neutral at 105.90, closing a 0.80% weekly gain.
- Fed hawks revived USD strength during the week.
- UoM consumer sentiment data come in lower than expected.
- The focus shifts to next week’s inflation figure from the US from October.
The US Dollar (USD) showed minimal movement on Friday. The DXY index, which measures the value of the US Dollar versus a basket of global currencies, stood flat at 105.90 as bulls seem to be taking a hiatus. The Greenback strengthened after Federal Reserve (Fed) hawks hinted that there may be further tightening, which revived the US Treasury, allowing the Dollar to gain interest.
Despite the United States’ labor market showing signs of cooling down last week, several officials, including Chair Powell, seemed unsatisfied with the progress made on inflation. They spoke with cautious tones, welcoming the recent data but leaving the door open for further tightening in case it is needed. The focus seems to have turned to next week’s October inflation figures from the US.
Daily Digest Market Movers: US Dollar flattens, consolidating weekly gains
- The US Dollar Index is mildly neutral at 105.90 after rising in three out of the last four sessions.
- The University of Michigan revealed that the Michigan Consumer Sentiment index from November came in lower than expected at 60.4 vs the consensus of 63.7, declining from its previous reading of 63.8.
- Markets await next week’s Consumer Price Index (CPI) figures from October from the US.
- The Initial Jobless Claims from the week ending November 3 came in at 217,000, lower than the expected 218,000 and fell in relation to its last reading of 220,000.
- After sharply declining last week, US Treasury yields recovered throughout the week. The 2-year Treasury yield rose back to 5%, while the longer-term 5 and 10-year rates increased to 4.59% and 4.60%, which seems to be limiting downside for the USD.
- Investors continue to be on the sidelines, awaiting high-tier reports to continue placing their bets on the next Fed decision.
- According to the CME FedWatch Tool, the odds of a 25-basis-point hike in December are extremely low, below 10%.
Technical Analysis: US Dollar Index approaches 20-day SMA, bulls must step in
Analysing the daily chart, a neutral outlook is evident for the DXY Index. What gives the outlook neutrality is the index staying below the 20-day Simple Moving Average (SMA) but above the 100 and 200-day SMAs. Bulls are striving to regain the short-term 20-day SMA. As long as the bears hold the index below this level, the DXY will be prone to further downside.
In the meantime, the Relative Strength Index (RSI) turned flat over its midpoint, while the Moving Average Convergence (MACD) displays flat red bars suggesting that the bears momentum has flattened contributing to the neutral outlook.
Support levels: 105.80, 105.50,105.30.
Resistance levels: 106.00, 106.10 (20-day SMA), 106.30.
US Dollar FAQs
What is the US Dollar?
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.
How do the decisions of the Federal Reserve impact the US Dollar?
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.
What is Quantitative Easing and how does it influence the US Dollar?
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.
What is Quantitative Tightening and how does it influence the 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.
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