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The Dollar remains sideways awaiting the FOMC Minutes

  • The DXY is trading at 103.50 on Tuesday, with slight gains.
  • Investors will be watching the FOMC minutes due at 19:00 GMT.
  • US yields are falling, limiting the dollar’s upside potential.

In Tuesday’s session, the Dollar Index is trading with slight gains around the 103.50 area, as investors prepare for the November minutes of the Federal Open Market Committee (FOMC). The Signals will look for clues to shape their expectations about the next moves of the Federal Reserve (Fed).

Recently, the US economy has shown signs of cooling inflation and a slowdown in the labor market, which has provoked a positive response from the waiting markets, as they now trust that the Fed will not raise rates further, which will significantly weaken the US dollar and Treasury yields.

Daily summary of market movements: The US dollar awaits a catalyst to define its trajectory

  • The DXY Dollar Index is trading neutrally around 103.50.
  • The yields on 2, 5 and 10-year Treasury bonds fell to 4.86%, 4.41% and 4.41%, respectively, which limits the dollar’s upward path.
  • Markets will look for any clues about the FOMC’s stance on inflation in the November minutes to place their bets ahead of the upcoming Fed meetings.
  • 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.
  • In the US, durable goods data for October will be released on Wednesday and S&P Global PMIs for November will be released on Friday.

Technical Analysis: Dollar bears take a breather, RSI still near 30

On the daily chart, the Relative Strength Index (RSI) remains flat near the oversold threshold, while the Moving Average Convergence Divergence (MACD) shows flat red bars. Both indicators point to a slight breakout of the bears before the Thanksgiving holiday.

On a broader scale, the DXY is below the 20-day, 100-day, and 200-day SMA, suggesting that sellers are still in charge on the broader scale.

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, when the gold standard disappeared.

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, 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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