US Dollar trades mildly up in quiet Wednesday
- Fed's stance over inflation signals caution, not panic, over higher inflation projections.
- Investors await incoming data to form further expectations on the timing of the easing cycle.
- PCE figures for February are due on Friday, and will be key to Greenback price action.
The US Dollar Index (DXY) is currently trading with mild gains at 104.3, a level close to Friday's peak of 104.50. Investors seem to be on the sidelines as they wait for fresh drivers to place their bets on the timing of the Federal Reserve’s (Fed) easing cycle.
That being said, the Federal Reserve appeared less aggressive last week, adopting a cautious approach toward the easing cycle that's anticipated to start in June. This stance comes after an upward revision of inflation projections and reassurances from Chair Jerome Powell that the bank will avoid overreacting to two months of high inflation figures. However, the US Dollar managed to clear all the post-Fed losses, mainly as the US economy holds resilient.
Daily digest market movers: DXY mildly higher as investors prepare for PCE data
- Statements from Fed speakers are under focus after the FOMC meeting, Waller will be on the wires later in the session.
- According to the CME FedWatch Tool, the odds of easing starting in June stand near 60%.
- The headline Personal Consumption Expenditures (PCE) is expected to have risen by 2.5% YoY, while the core measure is seen coming in at 2.8%. The outcome of the Fed’s preferred gauge of inflation will dictate the pace of the USD for the short term.
- US Treasury bond yields are falling, with the 2-year yield standing at 4.56%, the 5-year yield at 4.19%, and the 10-year yield at 4.20%.
DXY technical analysis: DXY is under bulls control while indicators flatten
The Relative Strength Index (RSI) is currently reflecting a flat position in positive territory, which indicates stable buying pressure. The Moving Average Convergence Divergence (MACD) shows flat green bars, suggesting that buying momentum remains intact. Furthermore, the placement of the index above its 20, 100 and 200-day Simple Moving Averages (SMAs) confirms the long-term bullish bias.
The flatness of the indicators comes after a 1% winning week, which may push the Index into a consolidation phase as investors await new fundamental drivers. In the meantime, if the Index holds above its main SMAs, the outlook will be bright.
US Dollar FAQs
What is the US Dollar?
The US 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 found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022.
Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
How do the decisions of the Federal Reserve impact the US Dollar?
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
What is Quantitative Easing and how does it influence the US 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 in a stuck financial system.
It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering 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 in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
What is Quantitative Tightening and how does it influence the US Dollar?
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.