- The DXY Index rose to 103.65, up by 0.20%.
- FOMC members considered that the progress on inflation is “limited”.
- The US yields are still down on the day, limiting the US Dollar’s advance.
In Tuesday’s session, the US Dollar Index traded with 0.20% gains around the 103.65 area as investors seemed to be spooked by the hawkish tone of the Federal Open Market Committee (FOMC) participants in the November minutes.
Recently, the US economy has shown indications of cooling inflation and a slowing labor market, leading to a positive response from markets in anticipation as they now are confident that the Fed won’t hike any more, significantly weakening the US Dollar and Treasury yields. The November minutes revealed that the bank needs to see “more” evidence of inflation cooling down to call it a victory and that the progress made on inflation was limited which provided some lift to the Greenback and turning somewhat the market’s hype.
Daily Digest Market Movers: US Dollar finds demand on hawkish minutes, focus shifts to economic data
- The US Dollar DXY Index rose towards 103.65.
- As FOMC members need to gather more evidence of inflation cooling down, the focus shifts to the next high-tier reports. Before the December meeting, the Fed will receive an additional job and inflation report from November which will likely set the pace of the next decisions.
- The 2, 5 and 10-year rates are still down on the day at 4.88%, 4.42% and 4.43%, respectively, which limit the Greenback’s upside.
- In the meantime, according to the CME FedWatch Tool, investors have already priced in a no hike in December and are betting on rate cuts sooner than expected in May 2024. A sizable minority is even betting on a rate cut in March.
- The US will release October’s Durable Goods data on Wednesday and November’s S&P Global PMIs on Friday.
Technical Analysis: US Dollar bears take a break, RSI still near 30
On the daily chart, the Relative Strength Index (RSI) stands flat near the oversold threshold, while the Moving Average Convergence Divergence (MACD) lays out flat red bars. Both indicators point to the bears taking a slight break ahead of the Thanksgiving holiday.
On the broader scale, the index is below the 20, 100 and 200-day Simple Moving Averages (SMAs), suggesting that sellers are still in charge of the broader scale.
Support levels: 103.30, 103.15, 103.00.
Resistance levels: 103.60 (200-day SMA), 104.20 (100-day SMA),104.50.
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.
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