- The dollar faces selling pressure as investors wait for new catalysts.
- Dovish bets on the Fed and lower US yields weakened the greenback.
- Preliminary third quarter GDP estimates and PCE inflation data will be released in the United States this week.
The US Dollar (USD) as measured by the Dollar Index (DXY) retreated to the 105.75 area and consolidated below the 20-day simple moving average (SMA) on Monday. The fall in US Treasury yields makes markets bet on lower chances of a hike by the Federal Reserve (Fed) and the Dollar loses interest.
The latest data on the US economy suggests that economic activity is strong. The preliminary estimate of the Gross Domestic Product (GDP) for the third quarter will be released on Thursday and the main and underlying measures of Personal Consumption Expenditure (PCE) for September will be published on Friday. The latter is the Fed’s preferred inflation indicator. Accordingly, both data will offer a clearer perspective on the US economy and may play an important role in shaping expectations for the Fed’s upcoming decisions on December 1. November and December.
Daily summary of market movements: Dollar extends losses ahead of PCE and GDP data
- The Dollar Index fell to 105.60 at the time of writing, which is a decrease of almost 0.50%.
- There won’t be any relevant data on the economic calendar on Monday, so the focus is on high-level economic numbers due out later this week.
- An acceleration of the Gross Domestic Product is expected in the third quarter.
- Friday’s core PCE price index is expected to be 3.7% year-on-year, up from 3.9% previously.
- Meanwhile, US Treasury yields are falling: The yield on 2-, 5- and 10-year bonds stands at 5.07%, 4.80% and 4.84%, respectively.
- According to CME’s FedWatch tool, the odds of a 25 basis point hike at the December meeting remain low, close to 30%.
Technical Analysis: Dollar Index Struggle for Momentum Capped by 20-Day SMA
On the daily chart, the DXY Dollar Index shows a neutral to bearish short-term technical outlook. The Relative Strength Index (RSI), positioned below its midline with a southward slope, supports this view along with the negative moving average convergence divergence (MACD) indication, which shows red bars pointing towards a strengthening of the bearish trend. Furthermore, the pair is consolidating below the 20-day Simple Moving Average (SMA), and in case the bulls fail to recover above it, more declines are on the way.
The DXY has been on a strong bullish streak, with 11 consecutive weeks higher before peaking and forming a bearish Doji/Shooting Star candle in the first week of October. However, the DXY did not continue lower and closed higher the following week. Still, it is a warning sign of possible weakness on the horizon.
Supports:105.50, 105.30, 105.00.
Resistances: 106.33 (20-day SMA), 106.50, 107.00.
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 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.
