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The US Dollar gapped opened on Thursday after a big miss on the Richmond Manufacturing Index.
Equity markets are steady while US bond markets are seeing substantial buying.
The US Dollar Index breaks lower and was on its way to test 100.
The US Dollar (USD) took another nosedive in Asian trading on Thursday. The opening gap against the close from Wednesday was not a positive sign for the Greenback in the US Dollar Index (DXY). With the US trading session near, the DXY is starting to reverse is trading nearly flat for this Thursday.
On the economic front, the Jobless Claims data added to some support for the much battered Greenback. Although there was a jump in both Initial and Continuing Claims, the previous numbers were revised down. That means that the starting point for this week’s increase in Jobless Claims is starting at tighter, lower point against where it is at the moment.
Near 13:30 GMT the Jobless Claims have come out:
Initial Jobless Claims went from 206,000 to 218,000, while that 206,000 got revised from 205,000.
Continuing Claims went from 1,861,000 to 1,875,000, though the previous number was at 1,865,000. So a downward revision from the previous number and the new print in line with expectations.
At the same time, Wholesale Inventories came out and went from -0.4% to -0.2% as expected.
The Goods Trade Balance for November wetn from -89.8 billion USD to -90.3 billion USD.
At 15:00, Pending Home Sales will come out, and are expected to jump from -1.5% to +1% for November.
The US Treasury is heading to markets for some cheaper funding, allocating a 4-week bill and a 7-year Note.
Equities are going sideways with only one outlier: China. Both the Hang Seng and the Shenzhen Index are up over 2% after the Chinese regulator backtracked on earlier comments of a crackdown on electronic gaming and gambling companies.
The CME Group’s FedWatch Tool shows that markets are pricing in an 83.5% chance that the Federal Reserve will keep interest rates unchanged at its January 31 meeting. Around 16.5% expect the first cut already to take place. The uptick in favour of a rate cut comes after the big miss on expectations and further negative number in the Richmond Manufacturing Index on Wednesday.
The benchmark 10-year US Treasury Note trades near 3.81%, the lowest level since summer.
The US Dollar Index is gasping for air with US yields sinking lower across the yield curve in different maturities. Although the yields of other currencies are seeing their yields drop as well, markets are having tunnel vision with focus on the Greenback. Seeing the very thin-populated trading desks and several investors being out of the markets, not much counterweight is present to turn the ship back in favour of the Greenback for the remaining part of 2023.
First upside resistance to face is near 101.78 at the low of December 21. Although a long way to go, it looks not unthinkable that the DXY might test the descending trend line near 103.00. Depending on the catalyst that fuels the recovery in the Greenback, the 200-day Simple Moving Average (SMA) near 103.45 is firm last resistance before having more upside.
To the downside, the pivotal level at 101.70 – the low of August 4 and 10 – is now gone and holds no bearing anymore for support as it is too far gone. The current level, near 100.82, which aligns with the bottoms from February and April, could still hold some relevance and might hold for this Thursday. Should that level snap, nothing will stand in the way of DXY heading to the sub-100 region.
What does the Federal Reserve do, how does it impact the US Dollar?
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates.When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money.When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
How often does the Fed hold monetary policy meetings?
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions.The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
What is Quantitative Easing (QE) and how does it impact USD?
In extreme situations, the Federal Reserve may resort to a policy named 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 during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
What is Quantitative Tightening (QT) and how does it impact the US Dollar?
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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