US Dollar retreats on easing Middle-East tensions ahead of Retail Sales data
- The US Dollar faces some selling pressure after the de-escalation of tensions in the Middle East.
- Traders brace for US Retail Sales data on Monday.
- The US Dollar Index falls below 106.00 and looks for nearby support.
The US Dollar (USD) retraces on Monday after a very strong week in which the Greenback seemed to be on steroids. Markets are breathing a sigh of relief after Iran carried out a well-communicated attack against Israel without significant casualties and issued a statement on Monday saying that it is not looking for further escalation of tensions in the Middle East. The easing of safe-haven demand triggers some inflow into risk assets, with equities firmly in the green in Europe and the US, and weighs on the US Dollar.
On the economic data front, traders will face some key data at the start of the week. The main event on Monday is the US Retail Sales report for March. As always, any negative print in the actual number or a revision for the previous data will push the Greenback lower. Traders are thus warned that the revised numbers will be as important as the actual numbers.
Daily digest market movers: Retail Sales lookout
- At 12:30 GMT, most of the US data will be released:
- The NY Empire Manufacturing Index for April is expected to rise to -9, from the -20.9 reading of the previous month.
- The US Census Bureau will publish the Retail Sales for March:
- Retail Sales are expected to increase 0.3% on a monthly basis in March following the 0.6% increase seen in February.
- Retail Sales excluding transportation are expected to increase 0.4% in the month, slightly higher than the 0.3% registered in February.
- At 14:00 GMT, the February Business Inventories data will be released. Markets are expecting a 0.3% increase from the previous month.
- At 15:30 GMT, the US Treasury will auction a 3-month and a 6-month bill.
- Equities are in the green in Europe, with the German Dax up over 1%. US equity futures are also in the green, over 0.50% ahead of the US opening bell.
- According to the CME Group’s FedWatch Tool, expectations for a Fed pause in the May meeting are at 97.4%, while chances of a rate cut stand at 2.6%. The odds of a September rate cut have increased and are now higher than a cut at the June meeting.
- The benchmark 10-year US Treasury Note trades around 4.56%, slightly higher than the opening price for this week at 4.53%.
US Dollar Index Technical Analysis: Correcting a touch
The US Dollar Index (DXY) is easing on Monday ahead of the US Retail Sales numbers. The main driver for the retracement comes after Iran issued a statement this Monday saying that it does not want to seek any escalation in the Middle East. Markets are sending European and US equities higher, while safe-haven currencies are easing a touch, with the DXY Index retreating below 106.00.
On the upside, the first level for the DXY is the November 10 high at 106.01, just above the 106.00 figure. Further up and above the 107.00 round level, the DXY Index could meet resistance at 107.35, the October 3 high.
On the downside, the first important level is 105.88, a pivotal level since March 2023. Further down, 105.12 and 104.60 should also act as a support, ahead of the region with both the 55-day and the 200-day Simple Moving Averages (SMAs) at 103.97 and 103.84, respectively.
US Dollar FAQs
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.
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.
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.
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.