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The Dollar stops the bad streak with positive retail sales

  • The US Dollar Index (DXY) first fell to 104.00 and then recovered to 104.30.
  • The headline and core PPI cooled in October, while US retail sales declined but were lower than expected.
  • Investors seem to be concerned that the good economic activity data outweighs the cooling of inflation in the eyes of the Fed.

He US dollar (USD) rebounded in Wednesday’s session, buoyed by strong US retail sales numbers for October, which had investors somewhat concerned as Federal Reserve (Fed) officials could view it as a threat to advancing inflation .

However, given that both inflation and job creation in the US economy are cooling, it is 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 before their latest decisions in 2023, which could affect whether they ultimately decide to raise or not.

Daily Market Moves Summary: US Dollar Finds Support on Strong Retail Sales and Rising Yields

  • The Dollar Index recovered to 104.30 from a low around 103.98 and is at its lowest point since September.
  • The US Bureau of Labor Statistics reported that October saw a smaller-than-expected 1.3% year-over-year increase in the US Producer Price Index (PPI), falling short of the expected increase in the 1.9%. It also recorded a monthly decline of 0.5%, below the expected growth of 0.1%.
  • Additionally, the underlying Producer Price Index (PPI) for October fell short of expectations. It stood at 2.4% year-on-year, versus the expected 2.7%, and was down from its previous reading of 2.7%.
  • On the other hand, October retail sales were better than expected, falling 0.1% month-on-month versus the 0.3% decline expected.
  • US Treasury yields recovered slightly: the 2-year rate rose to 4.91%, while the 5-year and 10-year rates rose to 4.52% and 4.53%, respectively…
  • According to CME’s FedWatch tool, the odds of a 25 basis point hike in December are zero. Furthermore, markets are betting on rate cuts sooner than expected, in May 2024, if not March.

Technical Analysis: US Dollar bulls intervene and defend 100-day SMA, outlook remains negative

The daily chart suggests that the DXY has a neutral to bearish technical outlook, with the bulls having lost significant ground in the session on Tuesday. With a bearish trend below its midline, the Relative Strength Index (RSI) suggests bearish sentiment, while the Moving Average Convergence Histogram (MACD) exhibits larger red bars.

If we zoom in, even though the bears have gained ground and pushed the index below the 20-day SMA, it is still above the 100-day and 200-day SMA, suggesting that the Bulls are in control on the broader time frames.

Support Levels: 104.15 (100-day SMA), 103.60 (200-day SMA), 103.30.
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, 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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