Finance

US Dollar weaker as investors have a change of hart, away from Goldilocks and into recession

11/17/2023
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  • The Greenback slips back in the red and flirts with a new two-month low.
  • Traders are fretting on positioning going forward. 
  • The US Dollar Index flirts with a break below 104.

The US Dollar (USD) is sinking again, though the current decline is coming with another tone. Where the US Dollar decline on Tuesday saw a goldilocks scenario being pushed forward, where equities and commodities were able to rally higher. This Thursday rather turns into a recession outlook as bond prices rally, bond yields sink, equities are in the red and crude prices tank. 

The calendar this Thursday is a very packed one with all eyes on US Federal Reserve speakers: no less than five members of the Board of Governors are expected to speak. Add a few lighter data points that could confirm and reassure traders that the Fed is really done hiking, and some more Greenback devaluation is materializing.

Daily digest: US Dollar retreats on an uptick in Jobless Claims

  • US Senate has passed a temporary funding bill to avert a Government Shutdown. All eyes now on January 19th for the next deadline.
  • US President Joe Biden met Chinese President Xi Jinping at the historic Filoli estate south of San Francisco on Wednesday: Reports appear to be quite positive, with the two superpowers agreeing to reopen communication lines and China to regulate chemical exports used in the manufacture of the opioid fentanyl. Differences over Taiwan, however, remain a sore spot. 
  • No less than five US Federal Reserve members are due to speak this Thursday:
    1. Lisa D. Cook, a member of the Federal Reserve Board of Governors was due to speak at 11:00 GMT. No headlines to report from here speech.
    2. Cleveland Fed President Loretta Mester said that the Fed is comfortable on where rates are at the moment, and that the Fed remains data dependant.
    3. At 14:25, New York Fed President John Williams was due to speak, though no comments on policy outlook.
    4. Federal Reserve Board Governor Christopher Waller will take the stage near 15:30.
    5. Loretta Mester will speak for a second time this Thursday near 17:00, together with Lisa Cook. 
  • Around 13:30 GMT, the weekly Jobless Claims report was due:
    1. Initial Jobless Claims have risen from a revised 218,000 to 231,000.
    2. Continuing Claims have risen from a revised 1,833,000 to 1,865,000.
  • At the same time, the Import/Export Price Index was released:
    1. The Monthly Export Price Index for October went from a revised 0.5% to -0.59%.
    2. The Yearly Export Price Index was at -4.1% and headed to -4.9%.
    3. The Monthly Import Price Index for October went from a revised 0.4% to -0.8%.
    4. The Yearly Import Price Index was at -1.7% and went to -2%.
  • The last bit of information at 13:30 GMT was the Philadelphia Fed Manufacturing Survey for November, which went from -9 to -5.9.
  • Industrial Production for the month of October went from a revised 0.1% to -0.6%.
  • At 15:00 GMT the National Association of Home Builders (NAHB) Housing Market Index for November printed a decline from 40 to 34.
  • The last number of importance this Thursday will be the Kansas Fed Manufacturing Activity Index for November. The previous number was at -8, no forecast foreseen. 
  • Equities are undergoing some profit taking after their  two-day rally. The Hang Seng slides over 1%, while Japan was able to contain losses to less than 1%. European equities are opening marginally in the red, while US equity futures see the Nasdaq leading the decline. 
  • The CME Group’s FedWatch Tool shows that markets are pricing in a 100% chance,  up from 85.7% on Tuesday morning, that the Federal Reserve will keep interest rates unchanged at its meeting in December. 
  • The benchmark 10-year US Treasury yield trades at 4.43%, and is starting to tick up a bit, little by little.

US Dollar Index technical analysis: Shift from Goldilocks to Recession

The US Dollar is sinking and it looks like its decline is taking the form and shape of the Titanic. Where on Wednesday some hopes arose that a goldilocks scenario would be underway with rate cuts on the horizon, that sentiment is shifting towards a recession. Recent earnings overnight reminded investors that this earnings quarter was not the best and came with a few warnings for the future, which is now being extrapolated into a recession outlook for the near future. 

The DXY was able to bounce off the 100-day Simple Moving Average (SMA) near 104.20. Expect to see a bounce from there with 105.29, the low of November 6, as the market level where the DXY should try to close above this week. From there, the 55-day SMA at 105.71 is the next price point on the topside that needs to be reclaimed by US Dollar bulls before starting to think of more US Dollar strength to come into play. 

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. This materialised on Tuesday. For now the 100-day SMA is trying to hold, at 103.62, although the 200-day SMA is a much better candidate for support. Should that level even be broken substantially, a long term sell-off could get underway with the DXY falling between 101.00 and 100.00.

 

Fed FAQs

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money.
When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions.
The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

In extreme situations, the Federal Reserve may resort to a policy named 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 during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.

Source: https://www.fxstreet.com/news/us-dollar-steady-ahead-of-no-less-than-five-fed-speakers-202311161230