- The US Dollar Index (DXY) sees gains and retraces the 200-day SMA near 103.70.
- No relevant report was released on Tuesday, with attention focused on PCE and GDP data due out later this week.
- Rising yields and postponing markets' dovish bets on the Fed boost the Dollar.
The Dollar Index (USD) has been on an uptrend, with the index currently trading at the 103.70 level. This comes in anticipation of upcoming key inflation data and the impact of rising yields, as markets reduced their dovish bets on the Federal Reserve (Fed).
The US economy remains strong as traders await key data and central bank meetings this week. Despite the lack of major data or a Fed spokesperson, the market lowered its easing expectations to about 125 basis points in 2024, down from nearly 175 basis points at the beginning of the month, which has helped the recovery. of the Dollar.
Daily Markets Summary: US Dollar Gains Momentum as Rising Yields Drive Uptrend Amid Lack of High-Level Reports
- December Personal Consumption Expenditure (PCE) data will be released in the United States on Thursday, which is expected to show stagnating inflation. Fourth-quarter Gross Domestic Product (GDP) figures will also be released that day and markets expect economic activity to have cooled.
- US bond yields are rising, with the 2-year yield at 4.40%, the 5-year yield at 4.06%, and the 10-year yield at 4.15%. All three rates are nearing their January highs as investors adjust their expectations about the Fed's next decision.
- Projections from the CME's FedWatch tool show that market expectations for the start of the easing cycle have shifted to May.
Technical Analysis: DXY reclaims 200-day SMA as bulls find momentum
The daily chart indicators reflect a mix of bullish and bearish sentiments. The Relative Strength Index (RSI) is in positive territory, indicating sustained buying pressure in the market which is underlined by the appreciating slope of the RSI chart.
Simultaneously, the moving average convergence divergence (MACD) paints an opposite picture. The MACD histogram shows flat green bars, denoting a lack of bullish conviction. This MACD stagnation points to a balance in buying and selling pressures for the moment.
Looking at the simple moving averages (SMA), the DXY is trading above the 20-day SMA, indicating that the bulls remain in control in the near term. However, the bearish trend is evident as the index is trading below the 100-day SMA. All in all, optimism remains in the medium and long term, as the index has recovered the crucial 200-day SMA.
Support levels: 103.50 (200-day SMA), 103.30, 103.00.
Resistance levels: 103.80, 104.00, 104.10.
US Dollar FAQ
What is the US Dollar?
The United States 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 in circulation alongside local banknotes. According to 2022 data, it is the most traded currency in the world, with more than 88% of all global currency exchange operations, equivalent to an average of $6.6 trillion in daily transactions.
After World War II, the USD took over from the pound sterling as the world's reserve currency.
How do the decisions of the Federal Reserve affect the Dollar?
The single most important factor influencing the value of the US Dollar is monetary policy, which is determined by the Federal Reserve (Fed). The Fed has two mandates: achieve price stability (control inflation) and promote full employment. Your main tool to achieve these two objectives is to adjust interest rates.
When prices rise too quickly and inflation exceeds the 2% target set by the Fed, the Fed raises rates, which favors the price of the dollar. When Inflation falls below 2% or the unemployment rate is too high, the Fed can lower interest rates, which weighs on the Dollar.
What is Quantitative Easing and how does it influence the 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 into a clogged financial system. This is an unconventional policy measure used when credit has dried up because banks do not lend to each other (for fear of counterparty default). It is a last resort when a simple lowering of 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 of 2008. It involves the Fed printing more dollars and using them to buy US government bonds, primarily from financial institutions. QE usually leads to a weakening of the US Dollar.
What is quantitative tightening and how does it influence the US dollar?
Quantitative tightening (QT) is the reverse process by which the Federal Reserve stops purchasing bonds from financial institutions and does not reinvest the principal of maturing portfolio securities in new purchases. It is usually positive for the US dollar.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
