- The US dollar is in a narrow range at current levels as inflation fears fade.
- Inflation concerns are a top priority, leading to a mini-crisis in UK bonds.
- The US Dollar Index (DXY) is hovering around the 109.00 area in search of support.
The US Dollar Index (DXY), which tracks the value of the US currency against six major currencies, is trading steady above 109.00 on Thursday while bond markets retreat after an already volatile week. Yields rose around the world after traders started to worry about all the plans President-elect Donald Trump wants to implement, most of which are seen as highly inflationary. This has widened price differences between the United States and other countries
The aforementioned increases in yields sparked a mini-short crisis in UK bonds. This week, the UK’s long-term borrowing costs rose significantly and the pound fell. Markets view this as a sign that investors have lost confidence in the government’s ability to manage the national debt and control inflation, while the British government calms down by announcing that it will stick to its fiscal rules even if borrowing costs reach their highest levels since the financial crisis. Financial crisis, according to the Financial Times.
The US economic calendar is light, with a short trading day due to the National Day of Mourning for former President Jimmy Carter. The Challenger number for US job cuts for December will receive most of the attention, while four Fed members are scheduled to speak.
Daily summary of market drivers: stability
- US stock markets will remain closed or trade during shorter hours on Thursday in honor of former President Jimmy Carter.
- Challenger job cuts for December came in at 38,792, less than the previous 57,727.
- Fed minutes released Wednesday showed Fed officials emphasizing a gradual and perhaps longer fixed rate before considering further cuts, Bloomberg reported.
- At 14:00 GMT, Philadelphia Fed President Patrick Harker will speak in Princeton live to the New Jersey National Association of Corporate Directors, 2025 Economic Outlook Chapter.
- At approximately 17:40 GMT, Richmond Fed Thomas Barkin will speak before the Virginia Bankers Association and the Virginia Chamber of Commerce.
- At 18:30 GMT, Kansas City Fed President Jeffrey Schmid will deliver a speech on the economic and monetary policy outlook at the Economic Club of Kansas City.
- At approximately 18:35 GMT, Federal Reserve Governor Michelle Bowman will deliver a speech at the California Bankers Association’s 2025 Bank Presidents’ Symposium on ideas for 2024, including monetary policy, economic performance, and lessons from banking regulation.
- Stocks changed again, with European stocks and US futures turning green before the US opening bell.
- The CME FedWatch tool forecasts a 93.1% chance that interest rates will remain unchanged at current levels at the January meeting. Furthermore, expectations are that the Fed will remain data-driven with uncertainty that could impact the path of inflation once President-elect Donald Trump takes office on January 20.
- US bond yields fell with the US benchmark 10-year benchmark at 4.65%, far from a new nine-month high of 4.728% seen on Wednesday.
Technical analysis of the US Dollar Index: level now fixed at 109.00
The US Dollar Index (DXY) appears to have stopped rising above the 109.30 level on Thursday. Although the 110.00 level is very close, the DXY may need to fall back to 108.00 or lower in order to surpass the 110.00 level on the next rise, as the market appears to have fully priced in all elements of inflation at the moment.
On the upside, it is important that the green uptrend line continues as support, although this is often not the scenario. If the DXY can rise and break above the psychological barrier of 110.00, then 110.79 becomes the next big level. Once above that level, it extends all the way to 113.91, the double top as of November 2023.
Conversely, the first bearish barrier is 107.35, which has now turned into support. The next level that could stop any selling pressure is 106.52, with the 55-day SMA at 106.63 consolidating this support area.
US Dollar Index: daily chart
Federal Reserve Bank Questions and Answers
Monetary policy in the United States is shaped by the Federal Reserve Bank (Fed). The Federal Reserve has two missions: achieving price stability and promoting full employment. The primary tool for achieving these goals is adjusting interest rates. When prices rise too quickly and inflation is above the Fed’s 2% target, it raises interest rates, which increases borrowing costs throughout the economy. This causes the US dollar (USD) to strengthen because it makes the United States a more attractive place for international investors to park their money. When inflation falls below 2% or when the unemployment rate is very high, the Fed may lower interest rates to encourage borrowing, which affects the dollar.
The Federal Reserve (Fed) holds eight policy meetings annually, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC meeting is attended by twelve Fed officials – the seven members of the Board of Governors, the head of the New York Fed, and four of the remaining eleven Regional Reserve Bank presidents, who serve one-year terms on a rotating basis. .
In extreme cases, the Fed may resort to a policy called quantitative easing (QE). Quantitative easing is the process by which the Federal Reserve dramatically increases the flow of credit into a stuck financial system. It is a non-standard policy measure used during crises or when inflation is very low. It was the Fed’s weapon of choice during the Great Financial Crisis of 2008. It involves the Fed printing more dollars and using them to buy high-quality bonds from financial institutions. Quantitative easing usually weakens the US dollar.
Quantitative tightening (QT) is the reverse process of quantitative easing, where the Fed stops purchasing bonds from financial institutions and does not reinvest capital from bonds it holds outstanding, to purchase new bonds. This is usually positive for the value of the US dollar.