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The dollar falls to three-week lows due to improved market sentiment

  • The US dollar is trading lower after the publication of the Fed minutes.
  • Market sentiment improves following Nvidia's earnings beat and a new all-time high for the Japanese Nikkei.
  • The Dollar Index falls sharply below 104.00, and the bears try to break the heavy 200-day SMA.

The US Dollar (USD) faces a downturn on Thursday after a series of events accelerated a downward move in the US Dollar Index (DXY) overnight. The first decline occurred after the publication of the minutes of the January meeting of the US Federal Reserve. The decline came even though several participants in the Federal Open Market Committee (FOMC) expressed concern about cutting rates too quickly, having learned lessons from the old policy mistake made in the 1980s by the chairman of the Fed, Paul Volcker. With the DXY crushed, a second wave of selling in the Dollar occurred after Nvidia posted surprising earnings, spreading market optimism to Asia, where the Japanese Nikkei hit all-time highs.

Regarding economic data, on Thursday we will have an agenda full of leading indicators. Aside from the market-influencing initial jobless claims, February Purchasing Managers' Index (PMI) figures will also be released. Add to that no less than four Fed speakers, and volatility seems guaranteed.

Daily summary of market movements: The Fed doesn't care about the markets

  • The day will start at 13:30 GMT:
    • The publication of the Chicago Fed's January national activity index. The previous data was -0.15.
    • Applications for unemployment benefits will also be published:
      • Initial claims are expected to rise from 212,000 to 218,000.
      • Continuation claims are expected to decrease from 1.895 million to 1.885 million.
  • Preliminary S&P Global Purchasing Managers' Index figures for February will be released at 14:45 GMT.
    • The services PMI is expected to go from 52.5 to 52.
    • For its part, the manufacturing PMI would be at 50.5 compared to 50.7.
  • January Existing Home Sales will be published at 15:00 GMT. Sales are expected to increase from 3.78 million to 3.97 million.
  • The Kansas Fed manufacturing activity index for February will be released around 16:00 GMT. The previous figure was -17.
  • If Fed watchers are left wanting more, no less than four Fed members will speak this Thursday:
    • Fed Vice Chairman Philip Jefferson will speak at 15:00 GMT.
    • Philadelphia Fed President Patrick Harker will speak at 20:15 GMT.
    • Minneapolis Fed President Neel Kashkari will speak at 22:00 GMT.
    • Lisa Cook, a member of the Fed, will close the day on Thursday with a statement around 22:00 GMT.
  • Stocks are trading higher across the board. The Nikkei set new highs this Thursday, and the German DAX soared above 1% at the European open. US stock futures are trading in the green, with the Nasdaq flirting with 2% gains ahead of the open.
  • CME Group's FedWatch tool now focuses on the March 20 meeting. Expectations of a pause stand at 95.5%, while the odds of a rate cut stand at 4.5%.
  • The 10-year US Treasury bond is trading around 4.31% following the release of the Fed Minutes.

Technical Analysis of the Dollar Index: Markets waiting for the Fed

The US Dollar Index (DXY) retreated below 104.00 overnight. Although the main takeaway from the Fed minutes is that Fed members are concerned about premature interest rate cuts, Markets believe the June rate cut is on track. Meanwhile, Nvidia's earnings have sparked a wave of risk appetite around the world, and that sentiment is a second driver of the dollar's decline this Thursday. Later, the US PMI figures could recover some of the recent losses.

To the upside, the 100-day simple moving average (Kagi) near 104.98 is the first level to watch as support turned resistance. Should the Dollar reach 105.00 following the strong PMI numbers, 105.12 is a key level to watch. One step further, 105.88, the November 2023 high. Ultimately, 107.20 – the 2023 high – could even come back into reach, but that would be when markets re-assess the timing of a rate cut. the Fed, delaying it until the last quarter of 2024.

The 200-day SMA at 103.72 has been broken and should see more bears for further weakness. The 200-day SMA should not give way that easily, so a small pullback to that level could be more than granted. Ultimately, it will lose strength with continued selling pressure and could fall as low as 103.16 at the 55-day SMA.

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

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