US Dollar erases losses as Fed’s Waller backtracks

  • The US Dollar trades in the green across the board after comments from Fed’s Waller.
  • Traders are repricing the number and timing of cuts further down the line for the Fed, ECB and BoE. 
  • The US Dollar Index jumps to mid-103 and is at a technical turning point for more upside. 

The US Dollar (USD) roars with the US Dollar Index (DXY) popping above a few important technical levels. The move comes with markets finally realizing that rate cuts will not take place before June for either the US Federal Reserve (Fed), the European Central Bank (ECB) and the Bank of England (BoE). US Federal Reserve member Christopher Waller backtracked on his comments from early November and nuanced that rate cuts will come, though only when inflation does not pick up again. 

On the economic front there will be a lot to digest, with a bulk release near 13:30 GMT when US Retail Sales comes out. Meanwhile headlines are being released out of Davos where the World Economic Forum (WEF) is taking place. When that is still not enough, traders can dig their teeth into no less than three Fed speakers throughout this Wednesday.

Daily digest market movers: What a line up 

  • The World Economic Forum in Davos is entering its third day with a lot of headline risk from senior people – central bankers and leaders – making comments, statements and holding interviews. 
  • ECB’s Christine Lagarde said that enthusiasm in the markets on rate cuts is not helping to reduce inflation. A rate cut might be likely by the summer. That statement is curious seeing the ECB always shouted they were data dependent, that cuts were not foreseen for 2024 and that forward guidance was impossible. Although rate cuts are negative for a currency, in this case it would mean good news for the EU economy, which sees the Euro off the lows against the US Dollar (EUR/USD).
  • Commodity traders will brace for the release of the monthly OPEC market report. Normally foreseen near 12:00 GMT, though seems to be facing delays.
  • As well near 12:00, the Mortgage Bankers Association released its weekly MBA Mortgage Applications. Previous number was a rise of 9.9% with this week a rise of 10.4%..
  • Bulk data release with Retail Sales at 13:30 GMT:
    • Monthly Import Price Index for December expected to head from -0.4% to -0.5%.
    • Yearly Import Price Index for December seen heading from -1.4% to -2%.
    • Monthly Export Price Index for December to head from -0.9% to -0.6%.
    • Yearly Export Price Index for December will go from -5.2% to -0.7%.
    • Monthly Retail Sales for December expected to head from 0.3% to 0.4%.
    • Retail Sales without Cars is expected to stay steady near 0.2%
    • As always for Retail Sales, the previous number’s revision can often be more important and market moving than the actual number coming out. 
  • Fed speakers making their way to the stage this Wednesday:
    • At 14:00 GMT both Fed members Vice Chairman Michael Barr and Fed’s Board of Governors member Michelle Bowman are speaking.
    • Later this evening at 20:00 GMT, New York Fed’s John Williams will be speaking. 
  • Near 14:15 GMT both Industrial Production and Capacity Utilisation will be released. Industrial Production is seen heading to 0% from 0.2% for December, while Capacity Utilisation for December remains quite steady from 78.8% to 78.7%.
    • Around 15:00 the National Association of Home Builders (NAHB) will release its Housing Market Index for January. Previous was at 37, with 39 projected. In that same time slot, Business Inventories will be released, with a steady -0.10% expected for November. 
  • Right at the end of this packed Wednesday, near 18:00 GMT the US Treasury is allocating a 20-year Bond and the Fed’s Beige Book will be released near 19:00 GMT. 
  • Equity markets are not thriving in this growing yield environment. The goldilocks scenario for rate cuts as of March was fully priced in, and needs to be revalued now. This means a downturn for equities, with Chinese stock indices down across the board near 3%. European equities are nosediving over 1% and US equity futures are holding just above that 1% decline. 
  • The CME Group’s FedWatch Tool shows that markets are pricing in a 97.4% chance that the Federal Reserve will keep interest rates unchanged at its January 31 meeting. Around 2.6% expect the first cut already to take place. The more traders reprice cuts to later this year, a small rate hike expectation might come through in the coming days. 
  • The benchmark 10-year US Treasury Note jumps to 4.07% and is fueling a stronger US Dollar with its jump in yields. 

US Dollar Index Technical Analysis: Crossroad as we speak

The US Dollar Index (DXY) has made a run for it and is trading near the mid-103 area. A crucial point with no less than two important moving averages being nearby and both just a few pips away from each other. From a pure technical angle, if the DXY can pull off a daily close above these two moving averages, the Greenback can gain no less than 1% towards 104.45. 

The DXY is trading near the 55-day and the 200-day Simple Moving Averages (SMA) at 104.45. In case the DXY can get through that area, look for 104.44 as the first resistance level on the upside, in the form of the 100-day SMA. If that gets scattered as well, nothing will hold the DXY from heading to either 105.88 or 107.20, the high of September.  

The break from this Wednesday could turn into a bull trap, where US Dollar bulls are caught buying into the Greenback when it broke above both the 55-day and the 200-day SMA in early Wednesday trading. Price action would decline substantially and force US Dollar bulls to sell their position at a loss. This would see the DXY first drop to 102.60 at the ascending trend line from September. Once threading below it, the downturn is open to head to 102.


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.

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