- The DXY is trading just below the 200-day SMA as the bulls struggle to hold.
- December existing home sales were weak, while consumer sentiment from the University of Michigan came in better than expected.
- Dovish bets on the Fed remain high.
It is estimated that the US dollar (USD) will suffer slight losses at the end of the week and is currently posting a weekly gain of 0.90%. Strong data from the University of Michigan (UM) keeps the dollar afloat, but dovish bets on the Federal Reserve (Fed) limit upside potential.
The US economy appears overheated, tempering market expectations, although the odds of interest rate cuts in March and May remain around 50%. Thus, the US dollar remains in fluctuating currents, affected both by the resistance of economic results and by moderate bets on the Fed's probable movements.
Daily summary of market movements: Dollar remains neutral as markets evaluate UoM and housing data
- Michigan consumer expectations for the month of January, published by the University of Michigan (UM), stood at 75.9 points, which represents an increase compared to December's data (67.4).
- Five-year inflation expectations registered a slight decrease of 2.8% compared to 2.9% the previous month.
- Similarly, UM inflation expectations for January fell to 2.9% from 3..1% previously.
- January current conditions rose to 83.3 from 73.3 in December.
- December existing home sales from the National Association of Realtors (NAR) came in lower than expected at 3.78 million versus the expected 3.82 million.
- US bond yields continue to advance, with the 2-year yield at 4.41%, the 5-year yield at 4.09%, and the 10-year yield at 4.17%. All three are at their highest level since mid-December.
- According to the CME's FedWatch tool, the probabilities of cuts for March and May have decreased but remain high at 55% and 45%, respectively.
Technical Analysis: DXY bulls show resistance, must reclaim 200-day SMA
The Relative Strength Index (RSI) is showing an upward slope, falling into positive territory, which generally denotes bullish strength. This coincides with the Moving Average Convergence Divergence (MACD), which, driven by the ascending green bars, indicates strong buying momentum. However, these indicators are beginning to flatten as the index puts together a five-day winning streak.
According to the simple moving averages (SMA), the index maintains a positioning above the 20-day average, which denotes bullish dominance in the immediate short term. However, if the bulls fail to reclaim the 200-day SMA, further declines could ensue.
Support levels: 103.20, 103.00, 102.80.
Resistance levels: 103.40 (200-day SMA), 103.60, 103.80.
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.
