- DXY posts gains and trades slightly below the 100-day SMA.
- Consumer Spending remained stable in the fourth quarter, while GDP grew at a faster rate than expected.
- Markets continue to adjust their expectations.
The US Dollar Index (DXY) has traded at 103.55 on Thursday, representing gains of 0.30% following the release of key economic data, as the case for short-term rate cuts by the Federal Reserve (Fed ) continues to lose relevance.
The US economy once again demonstrates its resilience, as evidenced by strong GDP growth in the fourth quarter of 3.3%. The Federal Reserve's aggressive hikes have managed to moderate inflation without causing significant economic pain. Despite indicators of slowing economic momentum, such as declining household savings rates and job openings, the overall strength of production has boosted market confidence.
Daily summary of market movements: The dollar recovers after the good GDP data for the fourth quarter
- Real Gross Domestic Product (GDP), quarterly publication of the United States Bureau of Economic Analysis, grew in the fourth quarter at an annualized rate of 3.3%, above the 2% forecast, but below the 4.9% of the previous quarter .
- Personal Consumption Expenditure (PCE) (quarter-on-quarter) stood at 1.7%, matching expectations, as did the underlying index, which stood at 2%.
- For the Federal Reserve (Fed), these economic activity figures could pose a threat in their battle against inflation, which could cause them to delay the start of the relaxation cycle.
- CME's FedWatch tool shows that market expectations for the start of the easing cycle have shifted to May, as the odds of a March cut now sit near 42%.
Technical Analysis: DXY bulls intervene and reclaim the 200-day SMA
The daily chart indicators reflect a relatively neutral stance with a slight bullish bias. The Relative Strength Index (RSI) shows a positive slope in positive territory. This is usually a sign of bullish momentum, indicating that buying pressure is currently stronger.
The Moving Average Convergence Divergence (MACD) indicator is showing flat green bars, suggesting that the previous bullish momentum is on pause, but that buyers are still present in the market. Normally, a flat MACD in positive territory is usually considered a consolidation phase before the next bullish move.
If we look at the simple moving averages (SMA), the pair remains above the 20-day and 200-day SMA, while it remains below the 100-day SMA. This demonstrates a mixed picture, but the positioning above the 200-day SMA emphasizes the long-term uptrend, indicating that the bulls continue to maintain some dominance.
Support Levels: 103.50 (200-day SMA), 103.00, 102.80, 106.60 (20-day SMA).
Resistance Levels: 103.70, 103.90, 104.00.
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.
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
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.
