- US Dollar flattens ahead of Fed Minutes publication
Market news
US Dollar flattens ahead of Fed Minutes publication
- The Greenback trades mixed on Tuesday ahead of the release of the FOMC Minutes.
- Traders are opting for risk-on bets, undermining safe havens like the Swiss Franc and the US Dollar.
- The US Dollar Index falls to around 103.00, with risks of more downturn to come.
The US Dollar (USD) posted another fresh two-month low during the Asian trading session on Tuesday. The Greenback is down over 0.50% against the Japanese Yen (JPY) and the Chinese Renminbi (CNY) as the overall risk sentiment looks to be in favour of risk-on investment, with equities soaring and safe havens abating, adding to the depreciation call for the Greenback.
The calendar for this Tuesday is picking up pace, with one main event right at the end of the day: the FOMC Minutes from the latest Federal Reserve (Fed) meeting in November, when the central bank opted to leave interest rates unchanged. Traders and analysts will look for clues and side remarks on whether inflation is coming down quickly enough for the Fed to end its hiking cycle and either stay steady or enter a cutting cycle immediately thereafter. On Monday, the Chicago Mercantile Exchange (CME) Fed Fund futures, a tool that gauges market expectation of potential changes to the Fed funds rate, briefly priced in a small possibility of already a rate cut at the upcoming December meeting.
Daily digest: Markets going too quick?
- Tuesday’s economic calendar takes off at 13:30 GMT, with the Chicago Fed National Activity Index release for October. Previous reading was at 0.02.
- At 13:55 GMT, the Redbook Index for last week is due to be released. Previous was at 3%.
- At 15:00 GMT, Existing Home Sales data for October is due to come out. Expectations are for a small decline from 3.96 million to 3.9 million.
- At18:00 GMT, the US Treasury department will issue a 10-year TIPS auction.
- At 19:00 GMT, the main event for this Tuesday is the publication of the Fed’s latest FOMC Minutes.
- Equities are flat and looking for direction as Asian markets are not taking over the risk on sentiment that came from the US on Monday. Markets are bracing for the Nvidia earnings, which will come out after the US closing bell.
- The CME Group’s FedWatch Tool shows that markets are pricing in a 100% chance that the Federal Reserve will keep interest rates unchanged at its meeting in December.
- The benchmark 10-year US Treasury Note yield trades at 4.40%, extending its decline as demand remains present in buying US debt. The 20-year allocation on Monday was a big success with a bid-to-cover ratio of 2.58, above the 2.4 average.
US Dollar Index technical analysis: A doom scenario
The US Dollar is sticking to the technical approach after on Monday it breached the 200-day Simple Moving Average (SMA) at 103.62 when gauged by the US Dollar Index (DXY). The Fed FOMC Minutes could briefly provide some support and ease the Relative Strength Index, which is starting to trade in the oversold area on the daily chart. Although relief, do not expect a substantial turnaround as the market broadly anticipated that the Fed is done hiking, at least for now.
The DXY was unable to bounce off the 100-day SMA and is treading further water at the 200-day SMA. Look for the recovery bounce towards the 100-day SMA near 104.20. Should the DXY be able to close and open above it, look for a return to the 55-day SMA near 105.71 with 105.12 ahead of it as resistance.
Traders were warned that when the US Dollar Index would slide below that 55-day SMA, a big air pocket was opening up that could see the DXY fall substantially. The 200-day SMA is trying to keep everything together, though it is losing its impact quickly. The psychological 100-level comes into play. With a very slim economic calendar and several US market participants off the desk for the holidays, there is room for a potential big downturn this week.
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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