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The Dollar trades with modest gains following GDP revisions and PCE inflation data

  • The DXY is experiencing a modest rally, holding near three-month lows.
  • The annualized US GDP estimate for the third quarter was revised upward to 5.2%.
  • Markets await October PCE core inflation on Thursday.

The US Dollar Index (DXY) records moderate growth, trading at 102.85 on Wednesday. The DXY found traction due to solid revisions to the Gross Domestic Product (GDP) numbers for the third quarter that arrive ahead of Personal Consumption Expenditure (PCE) inflation data for October on Thursday. The dollar is also gaining interest following the hawkish words of Thomas Barkin, president of the Federal Reserve (Fed), who did not rule out a new rise in this cycle.

Despite the mixed labor market and cooling inflation, Fed officials do not exclude the possibility of a new tightening of monetary policy, thus adopting a slightly hawkish stance. This appears to be an attempt to prevent any possible inflationary slippage and reflects the delicate balance the central bank is trying to maintain. That said, everything will depend on the data that is known, and Thursday’s October PCE numbers will influence expectations for the Fed’s upcoming decisions.

Daily movements in the markets: The Dollar rises after the strong revisions of the GDP and the aggressive words of Thomas Barkin

  • Amid optimism of a soft landing, the US dollar is trading with slight gains today. The determining factor is the revised third quarter GDP data.
  • GDP was revised to 5.2%, beating the consensus estimate of 5% and the previous estimate of 4.9%.
  • On the other hand, Thomas Barkin of the Fed stated that he is not confident that inflation is on track to reach the 2% target set by the entity, and did not rule out another rate hike.
  • Meanwhile, US Treasury yields fall, but paring some of the daily declines. The 2, 5 and 10 year yields stand at 4.65%, 4.21% and 4.27%, respectively.
  • Markets await October core PCE numbers, the Fed’s preferred inflation gauge, which is expected to have slowed to 3.5% year-on-year from 3.7% in September.
  • Meanwhile, CME’s FedWatch tool suggests the Fed will not raise rates at the December meeting, with markets forecasting rate cuts as early as May 2024.

Technical Analysis: US Dollar under bearish pressure, RSI oversold

The indicators on the daily chart show a bearish outlook for the US dollar. The Relative Strength Index (RSI) Positioning suggests overwhelming selling momentum at 30. At the same time, the Moving Average Convergence (MACD) histogram shows a downward trajectory indicating a bearish trend. The bearish control is reaffirmed by the positioning of the currencies in relation to the simple moving averages (SMA).

On a larger scale, the asset is trading below the 20-day, 100-day, and 200-day SMAs, underscoring the bears’ strength. In this challenging scenario, the buying impulse is notably struggling. These technical signals derived from the RSI, MACD and SMAs collectively point to the continuation of the US Dollar’s bearish dominance in the near term.

Support levels: 102.50, 102.30, 102.00.
Resistance Levels: 103.60 (200-day SMA), 104.00, 104.20 (100-day SMA).

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

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