US Dollar holds gains despite soft data

  • US Dollar weakens following disappointing New York manufacturing data, which contracted unexpectedly in October.
  • Fed officials remain cautious with Kashkari favoring modest rate cuts and Waller urging a slower pace.
  • Markets are pricing high odds of 25 bps cuts in both November and December.

The US economy is facing mixed signals, with certain sectors indicating a slowdown, while others remain robust. Despite this, the Federal Reserve (Fed) has signaled that its approach to easing monetary policy will be guided by emerging economic indicators.

The US Dollar Index (DXY), which measures the value of the USD against a basket of six currencies, struggles for traction, hovering above 103.00. A disappointing New York manufacturing report, indicating an unexpected contraction in October, has weighed on recent US Dollar momentum.

Daily digest market movers: US Dollar declines amid Fed caution and mixed data

  • Fed officials Kashkari and Waller express caution, suggesting a more gradual pace of rate cuts than previously expected.
  • Strong jobs and CPI data have tempered expectations of aggressive Fed easing, and 125 bps of total easing over the next 12 months.
  • The New York Empire State Manufacturing Index for October was released, showing a significant decline into contraction at -11.9. This contrasts with the previous increase of 11.5 and falls well below expectations, which had anticipated a modest rise to 2.3.
  • On Thursday, markets will follow Retail Sales figures, which might shake the USD dynamics and Fed bets.

DXY technical outlook: DXY index shows bullish momentum, nears resistance

Technical analysis for the DXY index suggests a positive outlook, with indicators gaining momentum. The index has crossed above the 100-day SMA and is approaching the 200-day SMA at 103.80, which will be a key resistance level. Still, the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) indicators flash overbought signals, indicating potential profit-taking.

Support lies at 103.00, 102.50 and 102.30. Resistance levels are located at 103.30, 103.50 and 104.00.

US Dollar FAQs

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.

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.

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.

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.

 

Source: https://www.fxstreet.com/news/us-dollar-holds-gains-despite-soft-data-202410151819