Most Recent Article: US Dollar edges higher amid Middle East tensions, dovish Fed may limit the upside
- The US Dollar mixed into the US trading session.
- Markets are not fleeing to safe havens on the back of Red Sea geopolitical tensions.
- The US Dollar Index is torn between risk-on mood and Fed speakers pushing back on rate cut bets.
The US Dollar (USD) trades sideways on Wednesday, a mixed trading day on the quote board. Markets are ignoring the geopolitical risk and inflationary pressures that might come on the back of the rerouting of vessels forced by recent attacks in the Red Sea. Meanwhile, in the commodity space, Oil is soaring and OPEC+ is having a field day. The US Dollar Index is stuck just above 102.00, with the potential to move more sharply later this week on key US data.
On the economic front, there are not many top-tier numbers in the run-up to Thursday’s US Gross Domestic Product (GDP) data and Friday’s Personal Consumption Expenditures (PCE) Price Index. US Existing Home Sales surprised to the upside, and contradicts the earlier decline in Building Permits on the fact that current rate levels are further deteriorating the housing market.
Daily digest Market Movers: No fireworks until US GDP
- Several news agencies are reporting that Chinese President Xi Jinping said to US President Joe Biden that China will add Taiwan, though no date is set for the annexation.
- Colorado state has banned former US President Donald Trump from being on voting ballots in the upcoming Presidential elections. The State’s top court ruled that Trump was guilty of his role in the January 6 breach of Congress, which disqualifies him from running. This sentence can be upheld or reversed by the US Supreme Court.
- At 12:00 GMT, the Mortgage Bankers Association (MBA) was released.Previous number was 7.4% and declined by 1.5% this week.
- US Consumer Confidence for December jumped from 102, above the forecasts of 104.5, to 110.7.
- At the same time, Existing Home Sales data was released. Previous was for 3.79 million with an upbeat surprise at 3.82 million.
- Chicago Federal Reserve President Austan Goolsbee will be speaking near 17:00 GMT.
- Around 18:00 GMT, the US Treasury Department will allocate a 20-year bond auction.
- Equities are mixed. In Asia, the Japanese Nikkei closed up over 1%, while in China the Shanghai-Shenzhen index dropped over 1%. Europe is trading flat, with minor losses at hand.
- The CME Group’s FedWatch Tool shows that markets are pricing in a 87.6% chance that the Federal Reserve will keep interest rates unchanged at its January 31 meeting. Around 12.4% expect the first cut already to take place.
- The benchmark 10-year US Treasury Note trades near 3.89%, making another low since July.
US Dollar Index Technical Analysis: Awaiting a catalyst
The US Dollar Index is starting to consolidate looking at the daily chart. This points to both buyers and sellers being pushed toward each other, with lower highs and higher lows. Once the melting point has been reached, a breakout will take place either way, which fits with the US GDP numbers and PCE inflation being published on Thursday and Friday, respectively.
Still, US Dollar bulls have their work cut out to salvage what was lost last week. On the daily chart, look for 103.00 as the first level to watch. Once trading above there, the 200-day Simple Moving Average (SMA) at 103.50 is the next important level to get to.
To the downside, the pivotal level at 101.70– the low of August 4 and 10 – is vital to hold. Once broken, look for 100.82, which aligns with the bottoms from February and April. Should that level snap, nothing will stand in the way of DXY heading to the sub-100 region.
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-steadies-as-markets-ignore-increasing-geopolitical-risks-202312201230