- The Dollar is once again flirting with a downward break.
- Risk appetite given the improvement in the PMI indices of Germany and the EU.
- The Dollar Index faces pressure above the 103 area again.
The US Dollar (USD) is sinking with traders selling the Dollar on the assumption that this Wednesday's US Purchasing Managers' Index (PMI) numbers will decline further, while the European ones begin to turn. The initial movements came with the German and European Purchasing Managers' Indices (PMI), which in almost all sectors showed an improvement (although remaining in contraction territory). A further contraction in the US PMI figures late this afternoon could mean a collapse for the Dollar.
On the economic front, as already mentioned in the previous paragraph, the US PMI figures will be published this afternoon. The manufacturing figure will be especially significant (expected to remain unchanged at 47.9). Taking into account the current movement of the markets, a new sell-off of the Dollar could occur and the DXY could fall.
Daily summary of market movements: Traders are betting on a contraction in the PMI in the hope that the Fed will reduce its interest rates
- The German PMI index figures boosted the Euro against the Dollar. The German manufacturing PMI stood at 45.4, up from 43.3 previously.
- The French manufacturing PMI also surprised on the upside, as it went from 44.4 to 46.6.
- In the United States, the Mortgate Applicatoins of the Mortgage Bankers Association has already been published and stood at 3.7%, compared to 10.4% last week.
Around 14:45 GMT S&P Global will publish the Purchasing Managers' Index of the main sectors in the United States:
- Manufacturing for January is expected to remain unchanged at 47.9.
- The services sector is expected to be at 51.0 from 51.4.
- The composite index would be at 50.9, without expectations.
- The US Treasury will place a 5-year note on the markets around 6:00 p.m.
- Stock markets are trading higher following positive developments in German and EU PMI figures. All European indices rise more than 1%. In the US, Netflix posted better-than-expected subscription numbers, sending the Nasdaq soaring ahead of the US opening bell.
- CME Group's FedWatch tool shows that markets are pricing in a 97.4% chance of a flat rate decision on Jan. 31, with a slim 2.6% chance of a cut.
- The 10-year US Treasury yield sinks and flirts with returning below 4% as risk appetite returns to markets.
Dollar Index Technical Analysis: PMI will deal a blow to Dollar recovery in 2024
The Dollar Index (DXY) falls after Europe reported two bullish Manufacturing PMI numbers. Although both European figures remain in contraction, this does not mean that the EU is out of the woods yet, or that it is outperforming the US. This afternoon's US PMI figures could lead to further losses for the Dollar if the numbers are disappointing, or return the Dollar to its previous level in Asian trade if they surprise to the upside.
There is some economic data that could still make an argument for the DXY to break above those two moving averages again and break out. We look for 104.44 as the first level of resistance to the upside, in the form of the 100-day SMA. If that also disperses, nothing will stop the DXY from heading to 105.88 or 107.20, the September high.
A bullish trap appears to be afoot, where the Dollar bulls were caught buying the Dollar when it broke above the 55-day SMA and the 200-day SMA in last week's trading. Prices could fall substantially and force bulls to sell their positions at a loss. In this way, the DXY would first fall to 102.60, on the ascending trend line since September. Once below, the recession would open towards 102.00.
US Dollar FAQ
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 a significant number of other countries where it is in circulation 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.
How do the decisions of the Federal Reserve 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, the Fed 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 portfolio 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.
