- The US Dollar Index (DXY) stands at 107.00, up 0.30% on the day.
- The ISM manufacturing PMI for October was lower than expected, as were the ADP numbers.
- Markets are awaiting the Fed’s decision later in the session.
He United States dollar (USD) srose on Wednesday, with the US Dollar Index (DXY) hitting near one-month highs above 107.00. Despite dismal US economic data released earlier in the session and falling US bond yields, a cautious mood in the market ahead of the Federal Reserve (Fed) decision keeps the dollar afloat.
Attention is focused on the economic situation in the United States, while markets await data to continue shaping their expectations about the next decisions of the Federal Reserve (Fed). However, the likelihood of a 25 basis point rise in December, according to the CME’s FedWatch tool, remains slim, dampening the dollar’s potential for significant gains. A break is planned for Wednesday’s meeting. The Fed is expected to announce hawkish messages, as in September, signaling that it will continue to rely on data but leaving the door open to further tightening if necessary.
Daily summary of market movements: The dollar falls from one-month highs after weak economic and labor activity figures
- The US Dollar Index (DXY) traded between 106.80 and 107.10 on Wednesday.
- The U.S. labor market is showing signs of weakness ahead of the October nonfarm payrolls release on Friday.
- Automatic Data Processing Inc. (ADP) reported that employment change fell short of expectations in October. The private sector added 113,000 jobs versus the expected 150,000, but accelerated compared to its last reading of 89,000.
- Regarding economic activity, the Institute for Supply Management (ISM) reported that its manufacturing PMI stood at 46.7 in October, below the expected 49, and fell from its previous reading of 49.
- Meanwhile, US government bond yields are falling sharply, with 2-, 5- and 10-year yields falling to 5.01%, 4.72% and 4.79%, respectively, contributing to the loss of Dollar boost.
- According to CME’s FedWatch tool, the odds of a 25 basis point hike in December remain low, at around 20%. Chairman Powell’s press conference and monetary policy statement are likely to influence those expectations.
Technical Analysis: Dollar Index continues to hold 20-day SMA with limited bullish momentum
Looking at the daily chart, there are signs of bullish exhaustion in the DXY. The Relative Strength Index (RSI) shows a flat slope above its midline, while the Moving Average Convergence Histogram (MACD) shows red bars. At the moment, the pair is above the 20,100 and 200-day SMA, indicating a favorable position for the bulls in the overall picture, but if the bears manage to break above the 20-day average, there will be more falls on the horizon.
Supports: 106.30 (20-day SMA), 106.00, 105.70.
Resistances: 106.90, 107.00, 107.30.
Frequently Asked Questions about the US Dollar
What is the US Dollar?
The United States Dollar (USD) is the official currency of the United States of America and the “de facto” currency of many other countries where it circulates alongside local banknotes. According to 2022 data, it is the most traded currency in the world, with more than 88% of all global currency exchange operations, equivalent to an average of $6.6 trillion in daily transactions.
After World War II, the USD took over from the Pound Sterling as the world’s reserve currency. For most of its history, the US dollar was backed by gold, until the Bretton Woods Agreement of 1971.
How do Federal Reserve decisions affect the dollar?
The single most important factor influencing the value of the US Dollar is monetary policy, which is determined by the Federal Reserve (Fed). The Fed has two mandates: achieve price stability (control inflation) and promote full employment. Your main tool to achieve these two objectives is to adjust interest rates.
When prices rise too quickly and inflation exceeds the 2% target set by the Fed, it raises rates, which favors the price of the Dollar. When Inflation falls below 2% or the unemployment rate is too high, the Fed can lower interest rates, which weighs on the Dollar.
What is Quantitative Easing and how does it influence the Dollar?
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 into a clogged financial system.
This is an unconventional policy measure used when credit has dried up because banks do not lend to each other (for fear of counterparty default). It is a last resort when a simple lowering of 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 of 2008. It involves the Fed printing more dollars and using them to buy US government bonds, primarily from financial institutions. QE usually leads to a weakening of the US Dollar.
What is quantitative tightening and how does it influence the US dollar?
Quantitative tightening (QT) is the reverse process by which the Federal Reserve stops purchasing bonds from financial institutions and does not reinvest the principal of maturing securities in new purchases. It is usually positive for the US dollar.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
