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The Dollar heads lower and breaks a crucial support level

  • The Dollar opens the week in the red, at two-month lows.
  • Traders continue to bet on rate cuts by the main central banks.
  • The Dollar Index remains above 103.00, although a sell-off could occur in the DXY near 101.00.

He US dollar (USD) starts this holiday week in the red as US traders look for the best Black Friday deals ahead of Thursday’s turkey dinner. The Dollar Index (DXY) has broken some highly relevant technical indicators as support or resistance. With a very light economic calendar this week, not many elements can be anticipated for a change of trend in the current recession for the Dollar.

The schedule for this Monday is very light, with only a few US Treasury bond auctions. The minutes of the Fed’s Federal Open Market Committee (FOMC) meeting will be published on Tuesday. Before the party national Thursday, the University of Michigan will release its latest data for November and the week will close with preliminary figures from the S&P Global Purchasing Managers’ Index (PMI).

Daily summary: US bleeds in silence

  • Geopolitical tensions are intensifying. There were rumors over the weekend about a five-day cessation of hostilities agreement, although the United States stopped short of confirming it. Meanwhile, this Monday morning an oil tanker in the Strait of Hormuz was seized by rebels supported by Iran, according to the Tokyo-based company Nippon Yusen KK, which chartered the ship.
  • The US Treasury will go to the markets to relocate some bonds:
    • A 3-month bill will be issued at 16:30 GMT.
    • At 16:30 GMT a 6-month bill will be issued.
    • A 20-year bond auction will take place at 18:00 GMT.
  • Overnight, the People’s Bank of China (PBOC) issued a much stronger fix for its Yuan, pushing the Chinese currency substantially stronger against the Dollar by 0.70%.
  • Furthermore, the Dollar loses more than 1% against the Japanese Yen.
  • Stocks are searching for direction as the question remains whether a recession will take place before or after interest rate cuts by central banks. The only notable value this Monday is the Hang Seng index, which rose nearly 2% at the close of the session in China.
  • CME Group’s FedWatch tool shows that markets are 99.8% pricing in the likelihood that the Federal Reserve will keep interest rates unchanged at its December meeting. A modest 0.2% believe a cut will occur.
  • The 10-year US Treasury bond yield is trading at 4.45%.

Technical analysis of the Dollar Index: A catastrophic scenario

The US Dollar is signaling distress to the markets, accumulating several preliminary red lights when measured by the US Dollar Index (DXY). On both the daily and weekly charts, DXY is breaking several major support zones, which could mean a larger and broader downtrend in the coming weeks and months from a purely technical perspective. Especially the break of the 200-day SMA on the daily chart, combined with the weekly break below the 55-day and 100-day SMA, is a worrying sign that the DXY could depreciate further.

The DXY was unable to bounce off the 100-day SMA and is taking down the 200-day SMA. Look for recovery bounce towards the 100-day SMA near 104.20. If the DXY manages to close and open above it, expect a return to the 55-day SMA near 105.71 with 105.12 as resistance.

Traders were warned that when the Dollar Index slipped below the 55-day SMA, a large air pocket would open that could cause a substantial drop in the DXY. The 200-day SMA tries to remain calm, although if there were a new decline, the psychological level of 100 points would come into play. With a very thin economic calendar and several US market participants off the table for the holidays, there is room for a possible major downturn this week.

Frequently asked questions about the Dollar

What is the US Dollar?

The United States Dollar (USD) is the official currency of the United States, 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 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 into new purchases. It is usually positive for the US dollar.

Source: Fx Street

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