US Dollar retraces after strong Tuesday as recession fears abate
- The US Dollar is letting off some steam after its strong performance on Tuesday.
- Very light data calendar points to a rather uneventful day in the wake of US inflation data on Thursday.
- The US Dollar Index nudges lower, eyes key support test.
The US Dollar (USD) is a touch lower after its roaring performance on Tuesday. A mix of events – with lacklustre import/export data out China together with resparked recession fears, and the 40% tax on profits for Italian banks – served a risk averse cocktail which fueled the rally in the Greenback across the board in every major G10 pair. The very light economic calendar and the US Consumer Price Index (CPI) numbers on Thursday will see traders sitting on their hands for Wednesday in order to keep their powder dry for the main event.
On the economic front, a light release calendar is on the cards, with only the weekly Mortgage Applications numbers expected. From the commodity side, the US Energy Information Administration (EIA) will release Crude Oil and derivatives numbers. This release will get some additional attention as Western Texas Intermediate (WTI) crude price went on a wild ride on Tuesday, by first dropping 3.10% during the European session and then rallying 4% during the US trading session.
Daily digest: US Dollar steady as it awaits big-stakes events on Thursday and Friday
- Markets will face the first and only piece of macroeconomic data out of the US at 11:00 GMT with the weekly Mortgage Bankers Association (MBA) Mortgage Applications.
- The US Treasury Department is about to tap the markets for a 10-year note auction. As the 10-year tenor acts as an important benchmark, expect some additional attention to any bid/cover ratios and demanded yields.
- Expect a bit of fireworks from the US Energy Information Administration (EIA) Crude Oil numbers. Western Texas Intermediate (WTI) crude price moved over 7% in intraday volatility on Tuesday, and as recession fears are fading on Wednesday, a drop in stockpile could fuel a pop higher in the Crude Oil price.
- Stocks are rebounding a bit with the Hang Seng unchanged and European equities on the front foot. Both the German DAX and the European Stoxx 50 are paring back losses from Tuesday. US equity futures are in good shape to have a green Wall Street opening later on the day.
- The CME Group FedWatch Tool shows that markets are pricing in an 86.5% chance that the Federal Reserve will pause interest rate hikes at its meeting in September.
- The benchmark 10-year US Treasury bond yield trades at 4.01% and is trading higher after the drop below 4% intraday on Tuesday. The risk aversion from Tuesday seems to be in the rear mirror and US bonds are no longer heavily bid.
US Dollar Index technical analysis: Big test for support
The US Dollar made it through a very difficult area on the US Dollar Index (DXY) chart. The region with both the 100-day and the 55-day Simple Moving Average (SMA) has been broken to the upside and must have hurt quite a few US Dollar bears in the process. With the US Dollar retracing a little bit on Wednesday, it will be important to see if the 100-day SMA at 102.31 will be able to refrain the DXY from paring back all gains from Tuesday.
For the upside, 102.45 – where the 55-day SMA is located – is the next key level to have a daily close above in order to advance in a solid way. The fact this technical indicator already got breached below means that it misses buying-interest. In case the US Dollar Index is able to head back above it, look for 103 and a new monthly high to be at hand.
On the downside, the US Dollar bulls will want to defend that earlier mentioned 100-day SMA at 102.31, in order to avoid a full paring back of earlier gains for this week. If bulls fail to do so, expect to see a nosedive move toward 102.00. The low of past Friday at 101.74 could be a line in the sand to predict if more downside is to come, once it is being tested.
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.