- The Dollar advances close to 1% against the Japanese Yen.
- Traders will keep their powder dry ahead of Wednesday’s FOMC.
- The DXY Dollar Index remains above 104.00 and has more room to rise.
The US dollar (USD) remains stable positive on Monday in the last normal trading week for 2023. Some volatility picks up in the commodities complex as news suggests that the COP28 agreement is on the table after that the host country, Saudi Arabia, opposed “phasing out” fossil fuels, and would rather see a “reduction in consumption.” Meanwhile, traders are shrugging off recent US jobs reports and Central Bank futures now point to the European Central Bank (ECB) being the first to cut rates in the first quarter of 2024. , before the US Federal Reserve (Fed) does so in the second quarter of 2024.
On the economic front, apart from Tuesday’s CPI, traders will mainly wait for Wednesday, when the Fed will kick off before the BoE’s “Super Thursday”, in which no less than three major central banks will issue their latest policy decision. monetary policy for 2023 (four with the Fed included).
Daily summary: Latest calls from central banks
- Several news agencies report that a draft agreement has been drawn up for all countries to agree on after Saudi Arabia, which was the host this year, asked to redraft the phrase “phase out” instead of “reduce the consumption” of fossil fuels.
- However, the US presidential election is still a long way off: former President Donald Trump is leading the Republican primaries.
- A possible main driver for the BoJ’s sudden reversal in its monetary policy change could have come with the 13.6% year-on-year drop in Machine Tool Orders for Japan.
- Meanwhile, Chinese markets are trembling on fears of deflation. With the focus on central banks this week, the European Central Bank could face a similar problem, as inflation is sinking very quickly in the region and the ECB has already indicated to markets that it will not cut quickly.
- The US Treasury is the main driving force this Monday on the economic calendar with no less than four debt issues.
- Around 16:30 GMT, 3- and 6-month bills will be auctioned.
- At 18:00 GMT, a 10-year note and another 3-year note will be distributed.
- Equities soar in Asia after the BoJ statement. Japan closed with a rise of 1.50% on the Nikkei and 1.47% on the Topix. The Hang Seng, already closed, managed to erase an initial loss of 1.6% to close this Monday with a rise of 0.5%. European stocks aren’t sure what to make of all this messaging from Asia and are flat heading into Monday, along with US futures.
- The CME Group’s FedWatch tool shows that markets are pricing in a 97.7% chance that the Federal Reserve will keep interest rates unchanged at its meeting this week.
- The benchmark value of the 10-year US Treasury bond is trading around 4.25%, which is a considerable increase compared to last week. The US employment report last Friday revealed a persistent rebound in wages and another drop in unemployment, opening up the risk of persistent inflation.
DXY Dollar Index Technical Analysis: Stable above 104.00
The US dollar is preparing to rise again in this last trading week of the year in normal trading. This means that the latest volatility movements in the Dollar and its DXY Dollar Index will unfold this week. From a purely technical point of view, it appears that the DXY index will end the year near 105.00.
The DXY is recovering losses against the Japanese Yen, one of its main components, and is up 1% in the USD/JPY pair. The DXY is trading above 104.00 and would attract more volume if it were able to break above Friday’s high at 104.26. From there, the 100-day SMA near 104.55 looks very attractive to head towards ahead of Wednesday’s Fed meeting.
On the downside, the 200-day SMA has done a tremendous job supporting the DXY with buyers reaching below 103.56 and pushing it back towards that same level near the US closing bell. This week, we will have to watch the November lows near 102.46. Further downward pressure could put the 100.00 level in sight, should US yields sink below 4%.
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.
