- The DXY Index declined to 103.45, a 0.30% loss.
- The index will tally a 0.30% weekly loss as well.
- S&P PMIs showed a mixed outlook, with the manufacturing sector weakening and the service sector expanding.
The US Dollar (USD) is receding on Friday with the DXY index, which measures the value of the US Dollar versus a basket of global currencies, declining toward 103.45 on the back of mixed S&P PMIs and dovish bets on the Fed.
In line with that, the US economy is showing overall signs of cooling inflation and job creation, and soft S&P PMIs flashed signs of a weakening economy. This economic outlook makes traders believe that the Federal Reserve (Fed) will adopt a less aggressive stance, which is weakening the US Dollar.
Daily Digest Market Movers: US Dollar faces further downside as the US manufacturing sector weakens
- The US Dollar Index traded weaker and declined toward 103.45 on Friday.
- In November, the S&P Global Composite PMI remained stable at 50.7, signalling slight growth in the US private sector.
- Manufacturing PMI fell to 49.4, indicating a shift into contraction, and the Services PMI increased marginally to 50.8.
- What worried investors seemed to be the report of the first employment decline in US service and manufacturing sectors since mid-2020, driven by lower demand and higher costs.
- The market response included expectations of a more cautious Federal Reserve, resulting in a weaker US dollar.
- Markets are confident that the Federal Reserve won’t hike in December and are betting on four rate cuts in 2024, beginning in May.
- Core Personal Consumption Expenditures next week from October will play a big role in the short-term Fed's expectations.
Technical Analysis: US Dollar hints at a potential reversal as the RSI approaches 30
Although the daily Relative Strength Index (RSI) is nearing oversold conditions, suggesting a somewhat oversaturated bearish market, it also indicates the potential to reverse the upside as selling pressure appears to wane. This notion is reinforced by the Moving Average Convergence Divergence (MACD), which displays flat red bars, signalling an easing of bullish sentiment without a clear direction.
In addition, the DXY’s position below the 20, 100, and 200-day Simple Moving Averages (SMAs) also suggests that the sellers have the upper hand.
Support levels: 103.40, 103.30, 103.15.
Resistance levels: 103.60 (200-day SMA), 104.00, 104.20 (100-day SMA).
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.
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.
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.
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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