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The Dollar operates sideways after the weak economic activity figures

  • The US Dollar Index (DXY) first fell to 104.00 and then rose again to 104.30.
  • Jobless claims accelerated in the first week of November, while October Industrial Production disappointed.
  • The combination of the cooling labor market and the decline in inflation is leading investors to believe that the Fed’s rate hike cycle has come to an end.

He US dollar (USD) traded flat on Thursday and turned within the range of 104.00 to 104.30. The dollar remains under pressure as markets bet that the Federal Reserve (Fed) will be less aggressive than expected, following weak US jobless claims and industrial production numbers.

The US economy is showing signs of cooling, with a weakened labor market and declining inflation, making it highly unlikely that the Federal Reserve (Fed) will raise interest rates at its next meeting in December. That said, the bank will receive additional reports on CPI and non-farm payrolls ahead of its latest 2023 decisions, which could affect whether or not they ultimately decide to raise.

Daily Market Moves Summary: US Dollar Struggles for Momentum After Weak Data

  • The Dollar Index recovered to 104.30 from a low around 103.98 and is at its lowest point since September.
  • During the week ending November 11, the number of initial jobless claims in the United States increased to 231,000, exceeding the 220,000 expected.
  • The Philadelphia Fed manufacturing index improved slightly, standing at -5.9 points instead of the -9 expected.
  • Industrial Production in the United States disappointed expectations, experiencing 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%.
  • US Treasury yields extended their decline, with the 2-year Treasury yield rising to 4.86%, while the 5-year and 10-year rates rose to 4.43% and 4.43%, respectively.
  • According to CME’s FedWatch tool, the odds of a 25 basis point hike in December are zero. Markets are betting on a rate cut sooner than expected, in May 2024, if not March.

Technical Analysis: Dollar bulls put up a fight and defend the 100-day SMA

The daily chart suggests that the DXY has a neutral to bearish technical outlook, with the bulls having lost significant ground this week and struggling to gain momentum. The Relative Strength Index (RSI) is pointing south below 50, while the Moving Average Divergence (MACD) histogram is exhibiting larger red bars.

If we zoom in, even though the bears are gaining ground and pushing the index below the 20-day SMA, the bulls are defending the 100-day SMA, indicating that if the sellers fail to conquer it , the outlook will remain positive in a broader context.

Support Levels: 104.15 (100-day SMA), 103.60 (200-day SMA), 101.30.
Resistance levels: 104.50, 105.00,105.30.

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, 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 securities into new purchases. It is usually positive for the US dollar.

Source: Fx Street

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