US Dollar stops the bleeding on positive Retail Sales

The DXY index first declined to 104.00 and then recovered to 104.30.
The headline and core PPI cooled down in October, while US Retail Sales declined but were lower than expected.
Investors seem to worry that strong economic activity data might weigh more than cooling inflation in the Fed’s eyes.

The US Dollar (USD) found a lift in Wednesday's session, driven by solid US Retail Sales figures for October, which somewhat worried investors as Federal Reserve (Fed) officials might consider it a threat to the progress on inflation.

Nonetheless, considering that inflation and employment creation in the United States economy are both cooling down, it is highly unlikely that the Federal Reserve (Fed) will raise interest rates at the upcoming December meeting. That being said, the bank will receive additional CPI and Nonfarm Payrolls reports before its last decisions of 2023, which could impact whether they ultimately decide to hike or not.

Daily Digest Market Movers: US Dollar finds support on strong Retail Sales and rising yields

The US Dollar Index recovered to 104.30 from a low of around 103.98 and stands at its lowest point since September.
The US Bureau of Labor Statistics reported that October witnessed a less-than-expected increase of 1.3% YoY in the US Producer Price Index (PPI), falling short of the projected 1.9% rise. It also printed a monthly decline of 0.5% below the expected 0.1% growth.
In addition, the Core Producer Price Index (PPI) from October fell short of expectations. It came in at 2.4% YoY vs the expected 2.7% and declined from its previous reading of 2.7%.
On the other hand, the Retail Sales from October came in better than expected, declining by 0.1% MoM vs the expected 0.3% decline.
US Treasury yields slightly recovered, with the 2-year rate increasing to 4.91%, while the 5 and 10-year rates rose to 4.52% and 4.53%, respectively..
According to the CME FedWatch Tool, the odds of a 25-basis-point hike in December are zero. Also, markets arel betting on rate cuts appearing sooner than expected in May 2024, if not March.

Technical Analysis: US Dollar bulls step in and defend the 100-day SMA, outlook still negative

The daily chart suggests that the DXY has a neutral to bearish technical outlook with bulls having lost significant ground in Tuesday’s session. With a downward trend below its midline, the Relative Strength Index (RSI) suggests a bearish sentiment, while the Moving Average Convergence Divergence (MACD) histogram exhibits larger red bars.

Zooming out, despite the bears gaining ground and pushing the index below the 20-day Simple Moving Average (SMA), it is still above the 100 and 200-day SMAs, suggesting that the bulls are in command on the larger time frames.

Support levels: 104.15 (100-day SMA),103.60 (200-day SMA), 103.30.
Resistance levels: 104.50, 105.00,105.30.

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.