- The US dollar remains negative after Wednesday’s sell-off.
- Operators consider that central banks remain hawkish in the face of a rather dovish Fed.
- The DXY Dollar Index is trading at November lows of 102.50.
The US dollar (USD) corrects sharply for the second day in a row, with a very harsh correction that began on Wednesday during US Federal Reserve (Fed) Chairman Jerome Powell’s speech. The markets ignored all the comments about the possibility of “more increases when necessary” and the freedom that the Fed gives itself to “react as it sees fit to get inflation below 2%.” The only thing that mattered was that the dot plot projections showed a consensus for interest rate cuts in 2024.
Meanwhile, retail sales and jobless claims, which remain low, were but a drop in the bucket in the face of the massive firepower from central banks unveiled today. The Swiss National Bank (SNB), the Bank of England (BoE) and even the European Central Bank (ECB) were eagerly hawkish and did not revise their stance while inflation fell. During the ECB press conference, Lagarde even said that rate cuts had not been discussed or were on the table, which represents a 180-degree divergence from the Fed, where rate cuts are planned and announced for 2024.
Daily summary: ECB suddenly tougher than Fed
- At 13:30 GMT a large amount of US economic data was released:
- The monthly import price index went from -0.6% in October to -0.4% in November.
- The monthly export price index remained stable at -0.9%.
- Initial jobless claims fell from 221,000 to 202,000. Continuing applications increased from 1,856,000 to 1,876,000.
- November retail sales rose substantially from -0.2% to 0.3%. Retail sales without cars and transportation went from 0% to 0.2%.
- Central banks also spoke:
- The Swiss Central Bank (SNB) kept its rate unchanged at 1.75%.
- The Norwegian Central Bank (Norges Bank) rose 25 basis points, from 4.25% to 4.50%. This caused a substantial appreciation of the Norwegian Krone against the Dollar of 2.40% (USD/NOK) at the time of writing.
- The Bank of England left its reference rate unchanged at 5.25%. The result of the vote was 6 votes in favor of maintaining the rate and 3 in favor of an increase of 25 basis points. The British Pound is up about 1% against the Dollar at the time of writing.
- The European Central Bank (ECB) kept its interest rate unchanged at 4%. Inflation forecasts were cut a few points. The Euro gains 0.80% against the Dollar (EUR/USD) at the time of writing after Lagarde, president of the ECB, surprised the markets by saying that no rate cuts are planned for 2024 and that they were certainly not discussed in this meeting.
- With this surprise comment from Lagarde, all European gains are evaporating. US futures are slightly positive after the opening bell.
- The CME Group’s FedWatch tool shows that markets are pricing in a 79.3% chance that the Federal Reserve will keep interest rates unchanged at its Jan. 31 meeting. Around 20.7% expect the first cut to occur now.
- The 10-year US Treasury bonds are trading near 3.95%, which is a significant setback as markets anticipate several cuts by 2024.
Technical analysis of the DXY Dollar Index: The ECB takes the steam out of the Dollar
On Wednesday afternoon, after the Fed’s latest decision on interest rates for 2023, the Dollar took a hard toll. The dot plot showed cuts for 2024, although this should be nothing new to traders as Fed futures were already pointing to cuts for 2024 in the summer. With several other central banks set to issue their dovish announcements and rate cut predictions for 2024, it is only a matter of time before markets adjust their bets in favor of the US Dollar. In the rate differential, the Dollar remains a very profitable currency, and the greenback could see a large influx of investors again, which would send the DXY Dollar Index back up.
The US Dollar Index DXY could still re-emerge to more mid-level levels seen recently. The first level to recover is 103.00. Next, 103.52 – near the 200-day SMA – is the ideal candidate to target next. From there, 104.00 and 104.60 (100-day SMA) are the levels to watch.
To the downside, the field is open for further pullback. The only level standing in the way of the DXY index heading towards 101.00 is the November low near 102.46. Once broken, a large zone opens towards 101.00, with 102.00 briefly as support.
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.
