US Dollar rallies as US yields save the day with a new high since 2007

  • The Greenback ties up with gains in difficult trading day.
  • US housing market data leaves traders with disappointing tone.  
  • The US Dollar Index prints in the green. 

The US Dollar (USD) is being divided in two camps this week. On the one hand, traders  appreciate the Greenback as the situation in the Middle-East grows less certain. On the other hand, the local macroeconomic numbers are starting to lose their shine and  point to the possible start of a recession for the US. Either way, the US Dollar is moving in tight ranges and is heading lower when tracked by the US Dollar Index (DXY) for a third day in a row. 

On the data front, traders can get their hands dirty on some housing data: the Building Permits and Housing Starts are due on Wednesday. Do not expect market moving triggers but rather confirmation if the recent weakness in the US Dollar is granted.  The USD might even see a little continuation of that momentum. Additionally, three US Federal Reserve speakers are set to shed light on the US monetary stance. 

Daily digest: US Dollar saved by soaring yields

  • Biden has landed in Tel Aviv, Israel, at the start of the European trading session. Markets will be on the lookout for any supportive language from US President Joe Biden in terms of military support or actions. Meanwhile, more and more headlines emerge on who bombed the Palestinian hospital that killed hundreds of civilians. 
  • At 11:00 GMT, the Mortgage Bankers Association has issued the weekly Mortgage Applications for last week. Previous print was at 0.6% and now dropped to -6.9%.
  • The Building Permits went lower, from 1.543 million to 1.473 million for September. Housing Starts was, as expected, a build from 1.283 million to 1.358 million. 
  • Two Fed speakers speak at 16:00 GMT: Fed Board Member Christopher Waller and the New York Fed’s John Williams are taking the stage. Not much later, near 17:00 GMT, Fed Governor Michelle Bowman will speak as well.
  • The Fed’s Beige Book will be issued at 18:00 GMT.
  • To close off the day, expect to see some comments from Fed Governor Lisa Cook. 
  • Equities do not seem to care and are flat with minor losses or gains across the board. No real outliers to report as the US earnings season picks up speed. 
  • The CME Group’s FedWatch Tool shows that markets are pricing in a 90% chance that the Federal Reserve will keep interest rates unchanged at its meeting in November. 
  • The benchmark 10-year US Treasury yield rises to 4.89% as the bond market sell-off continues again this Wednesday. The highest level since 2007.

US Dollar Index technical analysis: DXY in toxic environment

The US Dollar is undergoing some moshpit action with both Dollar bulls and bears fighting over which direction the US Dollar Index (DXY) needs to go. On one hand, the US Dollar starts to see both macroeconomic numbers and equity earnings coming in positive, though retreating from previous elevated levels. Meanwhile, the fighting in Gaza might trigger ample US Dollar strength as a safe haven. For now, as long as a proxy war does not emerge, the Greenback is set to retreat little by little. 

A bounce above the daily trendline from July 18 might still materialise although that is starting to slip further away. On the topside, 107.19 is important to reach. If this is the case, 109.30 is the next level to watch. 

On the downside, the recent resistance at 105.88 did not do a good job supporting any downturn. Instead, look for 105.12 to keep the DXY above 105.00. If that fails to do the trick, 104.33 will be the best level to look for resurgence in US Dollar strength with the 55-day Simple Moving Average (SMA) as a support level. 

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.

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-down-for-a-third-day-in-a-row-as-biden-visits-israel-202310180939