- The US Dollar Index (DXY) stands at 103.45 on Monday, down 0.35% on the session.
- There will be no major US economic reports this week, and the November FOMC minutes will be the highlight of the week.
- US yields recovered slightly from September lows.
At the beginning of the week, the US Dollar, as measured by the US Dollar Index (DXY), retreated towards 103.45 and recorded a loss of 0.35%. On Friday, the Dollar closed its worst week since July, recording a weekly loss of 1.80%, driven by expectations of a less aggressive stance from the Federal Reserve (Fed) following the publication of last week’s inflation figures .
Along these lines, the United States Consumer Price Index (CPI) slowed in October to 3.2% year-on-year, and the core CPI fell to 4% year-on-year. In this sense, markets were happy that the softening of inflation could influence a less aggressive Fed, and investors now rule out a hike at the December meeting and foresee rate cuts before 2024.
Daily summary of market movements: US continues to weaken after mild inflation
- The Dollar Index started the week weak, falling 0.35% to 104.35 points.
- Investors are still digesting last week’s October inflation data in the United States.
- The US Bureau of Labor Statistics reported that the core Consumer Price Index (CPI) for October fell short of consensus. It stood at 4% year-on-year, compared to the 4.1% forecast, and decelerated from the previous 4.1%.
- The headline figure stood at 3.2% year-on-year, below the consensus of 3.3% and relative to its last reading of 3.7%.
- Furthermore, the underlying Producer Price Index (PPI) for October fell short of expectations. It stood at 2.4% year-on-year, compared to the expected 2.7%, and fell from its previous reading of 2.7%.
- On the other hand, October retail sales were better than expected, declining 0.1% month-on-month versus the 0.3% expected.
- During the week ending November 11, the number of initial claims for unemployment benefits in the United States increased to 231,000, exceeding the 220,000 expected.
- United States Industrial Production did not meet expectations and registered a month-on-month drop of 0.6%, higher than the -0.3% expected. It also registered a year-on-year decrease of 0.7%.
- The combination of falling inflation, a slowdown in job creation and signs of weakening economic activity made markets confident that the Fed will not risk raising rates again.
- In reaction, 2-, 5-, and 10-year yields fell to their lowest levels since early November and mid-September, adding selling pressure to the US dollar. On Monday, those rates rose to 4.91%, 4.46% and 4.45%, respectively, which could limit the dollar’s decline.
- Meanwhile, according to CME’s FedWatch tool, investors have already priced in no hike in December and are betting on rate cuts sooner than expected, in May 2024. A considerable minority is even betting on a rate cut in March.
- Among the week’s notable releases are the November Federal Open Market Committee (FOMC) minutes, October Durable Goods Orders on Wednesday, and November S&P PMIs on Friday.
Technical Analysis: US Dollar Bears Intervene with RSI Approaching Oversold Conditions
According to the daily chart, the US Dollar Index DXY is showing a bearish bias with increasing selling pressure, indicating a shift in favor of the bears. The Relative Strength Index (RSI) is approaching oversold conditions, a sign that an upward correction could be near, while the Moving Average Convergence Histogram (MACD) displays larger red bars.
On a broader scale, the index is below the 20-day, 100-day, and 200-day SMA, suggesting that buyers are struggling to overcome the overall downtrend and that bears remain in control.
Support levels: 103.30, 103.15, 103.00.
Resistance Levels: 103.60 (200-day SMA), 104.20 (100-day SMA), 104.50.
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. For most of its history, the US dollar was backed by gold, until the Bretton Woods Agreement of 1971.
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, 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 into 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.
