US Dollar trades mildly higher following mid-tier data, set to close out winning week
- The Greenback gears up to hold onto a 0.7% weekly gain.
- Sentiment data from the University of Michigan came in weak.
- On the bright side, Industrial Production data came in stronger than expected.
- The focus will now turn to next week’s FOMC meeting.
The US Dollar Index (DXY) is registering slight gains at the level of 103.40 on Friday, rebounding from December lows amid rising US Treasury yields. This follows the release of hot inflation data this week. The resilience of strong economic indicators and a cautious stance from the Federal Reserve (Fed) against hasty easing offer potential for US Dollar recovery. Next week, all eyes will be on the updated Federal Open Market Committee (FOMC) forecast, which could give additional traction to the USD.
Despite persistent inflation in the US, incoming data will continue to dictate the timing of the easing cycle, expected in June. Investors overlook hot inflation rates as mixed labor market data seems to have overshadowed it. Next week’s FOMC Dot Plot might also recalibrate the market’s expectations.
Daily digest market movers: US Dollar to close the week with mild gains after mid-tier data
- The University of Michigan reported the March Consumer Expectations index at 74.6, down from the previous figure of 75.2.
- The Consumer Sentiment index for March was reported at 76.5, slightly down from 76.9 in the previous period.
- The 5-Year Inflation Expectations remained steady at 2.9%.
- On the positive side, the Industrial Production (MoM) for February came in at 0.1%, which was an improvement from the previous report of -0.5%.
- US Treasury yields rise with the 2-year yield at 4.71%, the 5-year at 4.13%, and the 10-year at 4.29%.
- The market anticipates no rate cuts from the Federal Reserve in the coming week, with eyes on whether the Fed can ensure a smooth landing. Projections for a cut in May stand at 10%, while the likelihood of a June cut is around 65%.
- The market will focus on whether officials still envision three cuts in 2024.
DXY technical analysis: DXY sees a bearish undertone despite the recent bullish gains
The daily chart indicators reveal the dominance of selling momentum in DXY's technical landscape. The Relative Strength Index (RSI) prints a positive slope yet remains in negative terrain, suggesting that bears still hold the reins but with buyers building momentum. On the other hand, the Moving Average Convergence Divergence (MACD) histograms are showing decreasing red bars, highlighting decreasing selling pressure.
Adding to the bearish implications, DXY is trading below its 20, 100, and 200-day Simple Moving Averages (SMAs), pointing to a strong downtrend. This consolidation beneath the SMAs may suggest a short-term bearish outlook, offsetting any bullish attempt. Although bulls are gradually gaining ground, the prevailing selling momentum communicates strong downward pressure. Until the RSI climbs into bullish territory and MACD bars switch to the green zone, the bearish perspective will remain intact.
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.