US Dollar sidelined with US markets closed
- The US Dollar trades flat on Wednesday despite sluggish US Retail Sales.
- Markets face a relatively quiet trading day, with US markets closed in observance of Juneteenth.
- The US Dollar index holds above 105.00, though this week's upcoming US data might trigger a break.
The US Dollar (USD) trades flat on Wednesday, with US markets closed in observance of Juneteenth. US bond markets are closed and US equities will only see the futures markets moving. Traders will be able to let the dust settle after the downbeat Retail Sales report for May, released on Tuesday.
On the US economic data front, there are two data points to digest on a very light trading day. The Mortgage Bankers Association will release its Mortgage Applications number for the week of June 14. The number has some importance because it was in contraction for a few weeks in a row until the previous week was a staggering 15.6% uptick.
Daily digest market movers: A day off ahead
- Although US markets are closed on Wednesday, there are some key headlines to report:
- Japan's opposition front asked Japanese Prime Minister Fumio Kishida to call for snap elections, Bloomberg reported.
- The US has given the green light for an arms deal with Taiwan, triggering fury with China on the matter, Baha news reported.
- France, Italy, Belgium, and five other European countries are set to be reprimanded and fined for their deficits breaching EU finance rules, according to Bloomberg.
- At 11:00 GMT, the Mortgage Bankers Association releases its Mortgage Applications survey. Last week’s number snapped the contraction path with a staggering 15.6%.
- At 14:00 GMT, the National Association of Home Builders will release its June Housing Market Index. The previous number was 45, and a steady 45 is expected again.
- Equity markets are not doing well again, with all indices in Europe in the red. US futures are marginally in the green.
- The CME FedWatch Tool shows a 32.8% chance of the Fed interest rate remaining at the current level in September. Odds for a 25-basis-points rate cut stand at 60.0%, while a very slim 7.2% chance is priced in for a 50-basis-points rate cut.
- The benchmark 10-year US Treasury Note trades at its lowest level in a month, at 4.22%. No further moves expected today as bond markets are closed.
US Dollar Index Technical Analysis: How long until reality kicks in
The US Dollar Index (DXY) is trying to hold firm, though it is starting to lose its shine. With the European political turmoil starting to ease and fading into the background, US data comes to the forefront again. With downbeat US Retail Sales data for May released on Tuesday, the always resilient Dollar bulls must also start to doubt their beliefs. Under these current economic conditions, the Greenback is still a touch overvalued and needs another correction to head back to its fair value.
On the upside, there are no big changes to the levels traders need to watch out for. The first is 105.52, a barrier that held during most of April. The next level to watch is 105.88, which triggered a rejection at the start of May and will likely play its role as resistance again. Further up, the biggest challenge remains at 106.51, the year-to-date high from April 16.
On the downside, the trifecta of Simple Moving Averages (SMA) is still playing as support. First is the 55-day SMA at 105.12, safeguarding the 105.00 figure. A touch lower, near 104.59 and 104.47, both the 100-day and the 200-day SMA are forming a double layer of protection to support any declines. Should this area be broken, look for 104.00 to salvage the situation.
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.