- The US Dollar consolidates Wednesday gains and trades soft against its main rivals.
- Jobless Claims from the second week of October came in lower than expected.
- Chair Powell noted that tighter financial conditions via higher bond yields may have implications for the monetary policy.
- No highlights are due on Friday, and focus shifts to next week’s US PMIs.
The US Dollar (USD) measured by the US Dollar DXY Index declined as the green currency consolidated Wednesday’s gains and failed to gather momentum on better-than-expected Jobless Claims from the second week of October. During the American session, Federal Reserve Chair Jerome Powell sounded cautious regarding the Federal Reserve’s next steps, and as a reaction, the USD faced selling pressure.
The United States’ economic activity is strong, as revealed by the latest reports, including S&P Global PMIs, Industrial Production and Retail Sales. On Wednesday, the Federal Reserve’s Beige Book report described the US economic situation as “stable”, and as US Treasury yields stand at multi-year highs, investors may be gearing up for one last hike from the Fed in 2023. At the Economic Club of New York, Powell noted on Thursday that higher bond yields could make financial conditions tighter and have implications for the next decisions. However, he noted that the bank will proceed carefully and that there may still be meaningful tightening in the pipeline.
Daily Digest Market Movers: US Dollar declines as markets digest Powell’s words
- The US Dollar DXY declined near 106.00 after the speech and then settled at 106.30, seeing 0.20% daily losses, still above the 20-day Simple Moving Average (SMA).
- Traders seem to dumped the USD as they considered Powell’s words as dovish. However, incoming data will make tightening expectations rise and fall in the next sessions.
- On the data front, Jobless Claims for the week ending on October 13 came in at 198,000, lower than the expected 212,000 and the previous 211,000.
- In the meantime, at the time of writing US yields rose near multi-year highs, with the 2, 5 and 10-year rates standing at 5.19%, 4.95% and 4.99%, respectively.
- According to the CME FedWatch tool, the odds of a 25 bps hike in the December meeting stand near 30%.
- Next week’s S&P Manufacturing PMI will provide further insight on the US economic activity.
Technical analysis: US Dollar Index’s bulls step back but hold the 20-day SMA
The DXY index is in an intermediate bullish trend on the daily chart, holding above the key 20,100 and 200-day Simple Moving Average (SMA).
As of late bears gained some momentum and threatened the 20-day Simple Moving Average (SMA) at 106.30. Indicators on the daily chart reveal a rising bearish traction but in case price fails to conquer the mentioned average, further upside may be on the horizon.
The Relative Strength Index (RSI) is looking weak and pointing south, though still above 50. The Moving Average Convergence Divergence (MACD) saw a bearish cross on October 5 though the trend lower flipped on October 12 when the market made a recovery. Given the dominant uptrend the market could still rally.
The pair has had a strong run higher, with 11 consecutive up-weeks in a row before peaking and forming a bearish doji/shooting star candlestick in the first week of October. This was not followed through to the downside, however, with the following week closing higher. Still it is a warning sign of potential weakness on the horizon.
Supports: 106.28 (20-day SMA), 106.00, 105.80.
Resistances:106.55, 107.00, 107.30.
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money.
When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions.
The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named 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 during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.