US Dollar extends correction amid condensed bulk economic data release ahead of Thanksgiving
- The US Dollar trades on the back foot at the start of the last normal trading day of the week.
- With Thanksgiving and Black Friday ahead, Wednesday will release three days’s worth of economic data.
- The US Dollar Index extends this week’s correction and falls below 106.50 on Wednesday.
The US Dollar (USD) trades softer against most major peers in the currency markets, with the US Dollar Index (DXY), which gauges the Greenback’s value against six major currencies, extending this week’s correction and falling below the 106.50 level. The release of the Federal Open Market Committee (FOMC) Minutes on Tuesday did not really move the needle for markets, with confirmation that several Federal Reserve (Fed) members were advocating for either another rate cut in December or a pause in the cutting cycle. The fact that a rate hike was not discussed at all should put markets at ease on the Fed’s rate decision in December.
The US economic calendar is full on Wednesday, with three days of data compressed into a single trading day ahead of the Thanksgiving holidays. The main pivotal data is the Personal Consumption Expenditures (PCE) Price Index for October, the preferred inflation gauge for the Federal Reserve (Fed), which could shape expectations about the interest rate outlook for the Fed meeting in December. Alongside the PCE release, Durable Goods Orders data for October, revised Q3 Gross Domestic Product (GDP) estimates, and Initial Jobless Claims data for the week ending November 22 will be released.
Daily digest market movers: Set your alarm for 13:30 GMT
- At 13:30 GMT, traders will be glued to their screens for some major economic data releases on the US economy. Here are the ones to look out for:
- A revised reading of the US Gross Domestic Product for the third quarter:
- Headline GDP is expected to stabilise at 2.8%.
- The Price Index component is expected to stay flat at 1.8%.
- The PCE segment should remain unchanged at 1.5%.
- Weekly Initial Jobless Claims are expected to rise to 217,000 in the week ending on November 22, coming from 213,000 the prior week.
- Durable Goods Orders for October are expected to tick up 0.5%, compared to a 0.7% contraction in the previous month. Goods excluding transportation are expected to increase by 0.2% from the previous 0.5%.
- A revised reading of the US Gross Domestic Product for the third quarter:
- At 15:00 GMT, the Fed’s preferred inflation gauge will be released, the Personal Consumption Expenditures (PCE) for October:
- The monthly headline PCE is expected to have grown steadily by 0.2%.
- The monthly core PCE should portray a similar picture and show a steady growth of 0.3% compared to the previous month.
- On a yearly basis, the headline inflation is expected to accelerate to 2.3% in October from 2.1% a month earlier. The core PCE is estimated to have risen by 2.8%, stronger than the former release of 2.7%.
- Equities are very mixed, with China outperforming against the rest of the world. The Chinese Hang Seng closed above 2% gains on the day, while European equities and US futures are in the red.
- The CME FedWatch Tool is pricing in another 25 basis points (bps) rate cut by the Fed at the December 18 meeting by 66.5%. A 33.5% chance is for rates to remain unchanged. The Fed Minutes have helped the rate cut odds for December to move higher.
- The US 10-year benchmark rate trades at 4.27%, substantially lower from the high printed two weeks ago of 4.50% on November 15.
US Dollar Index Technical Analysis: Mixed bag
The US Dollar Index (DXY) is softening a touch ahead of the last important data release for this broken week with the Thanksgiving public holiday ahead. Experienced traders will know that it will be nearly impossible to trade on the back of the economic data release with too many moving parts influencing the direction of the Greenback and other asset classes. Besides that, a very valid argument can be made here that the Greenback has had a very profitable rally, with US traders ready to cash in before diving into their turkey.
The fresh two-year high at 108.07 seen on Friday is the first level to beat. Further up, the 109.00 big figure level is the next one in line. The support from October 2023 at 109.36 is certainly a level to watch out for on the topside.
Support comes in around 106.52, the double top from May. A touch lower, the pivotal 105.53 (April 11 high) should avoid any downturns towards 104.00. Should the DXY fall all the way towards 104.00, the big figure and the 200-day Simple Moving Average at 103.98 should catch any falling knife formation.
US Dollar Index: Daily Chart
US Dollar FAQs
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.
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.
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.
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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