- The DXY stabilized at 104.15 on Thursday after reaching a daily high of 104.40.
- Weekly Jobless Claims came in higher than expected in the week ended in February 3.
- Markets digest Fed official Barkin’s words.
The US Dollar (USD) steadily rose on Thursday, initially to 103.45 and then stabilizing at 104.15 on the back of positive Initial Jobless Claims figures. However, bulls seem to be running out of steam due to a lack of fresh drivers, while Federal Reserve (Fed) speakers refuse to give additional guidance on the bank’s next steps.
The US Federal Reserve’s Chair, Jerome Powell, commented that he considered a cut in March “unlikely”, adding that the bank needs more evidence on inflation coming down to gain confidence for cutting rates. Several officials were on the wires this week but didn’t give new guidance, basically confirming that the Fed awaits more data and disregards cuts in March.
Daily digest market movers: US Dollar gains some ground on positive Jobless Claims
- Initial Jobless Claims for the week ended on February 3 fell short of the consensus. The US Department of Labor reported that the claims came in at 218K, lower than the predicted 220K and a slight reduction from the previous week’s 227K claims.
- According to the CME FedWatch Tool, the possibility of rate cuts in March dropped to 20%. Those odds rise to 50% for the May meeting, where the probability of a hold is also high.
- An ascent in US Treasury bond yields also supports the US Dollar. The 2-year yield is at 4.45%, the 5-year yield is at 4.11%, and the 10-year yield is at 4.16%.
Technical analysis: DXY fails to regain the 100-day SMA, bulls still present
The daily Relative Strength Index (RSI) shows a flat slope, albeit in positive territory, hinting at a gradual slowdown in buying momentum. However, it is too soon to anticipate a bearish reversal as positive territory generally denotes a bullish bias.
The Moving Average Convergence Divergence (MACD) presents flat green bars, illustrating a slowdown in bullish momentum but without a bearish crossover. The MACD indicates that buying pressure is still present, albeit reduced.
Regarding the Simple Moving Averages (SMAs), the index is anchored above the 20-day and 200-day SMAs, signaling a bullish bias in the longer framework, yet it is trading below the 100-day SMA, demonstrating some bearish pressure in the intermediate term. In conclusion, the short-term technical outlook seems to be tilted in favor of the bulls, albeit with weakening momentum.
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.