Forex Trading, News, Systems and More

US Dollar softer with Red Sea tensions being circumvented swiftly


Share:

  • The US Dollar gains 1% against the Japanese Yen, though down 0.8% against UK Pound Sterling 
  • Traders see BoJ missing the window of opportunity for a hike. 
  • The US Dollar Index recovered on Friday, though not enough to change sentiment. 

The US Dollar (USD) is in a standstill, ahead of this Tuesday’s US opening bell. The Greenback was holding good cards to jump back into the green, with over 1% profit against the Japanese Yen triggered by a disappointing Bank of Japan rate decision. Ahead of the US opening bell, Pound Sterling (GBP/USD) is pushing back against that 1% profit for the Greenback with a 0.80% loss for the Greenback. 

On the economic front, the Housing Data is not helping neither with no big moves and even contractions in Building Permits. Meanwhile geopolitical tensions in the Red Sea are easing fast with all major freight shipping companies deviating their float from the region. This means longer and more expensive travel routes via Africa, which means some inflationary pressures coming for January for the consumer. 

Daily digest Market Movers: Housing data mixed

  • US Federal Reserve Member Tom Barkin from the Richmond Fed said in an interview with Yahoo! Finance that the Fed sees some economy segments weakening under the pressure of elevated rates. Rate cut in September is not a committed forward guidance, but a forecast based on current economic conditions.
  • The European Central Bank (ECB) is trying to backtrack on earlier statements that rate cuts for 2024 are not on the cards. ECB member François Villeroy de Galhau said this Tuesday morning that the ECB should cut in 2024 after a plateau of holding rates steady.
  • The Bank of Japan (BoJ) has probably missed its window of opportunity to hike out of negative rates. BoJ Governor Kazuo Ueda said that Japan is heading to 2% inflation under current conditions, and even gave forward guidance that the January meeting is not the right moment to adjust monetary policy. It looks that both inflation and macroeconomic conditions for Japan are heading back to normal levels which might never demand for monetary policy to strengthen. 
  • Housing data was a bit of a let down for markets:
    1. Monthly Building Permits went down by 2.5% from 1.498 million to 1.46 million.
    2. The November Housing Starts number jumped by 14.8% from 1.359 million to 1.56 million. 
  • The Redbook Index jumped marginally from 3.4% to 3.6%.
  • Asian equities are welcoming the standstill at the BoJ, and are popping higher. The Japanese Nikkei index is up over 1.4%. European and US equities are going sideways. In the US tech giant Apple is weighing now that the Chinese government has completely barred Apple products on the work floor. Domestically Apple is facing headwinds as well, as its Iwatch Ultra and 9 series are halted for sale because of a patent dispute on one of its technologies.  
  • The CME Group’s FedWatch Tool shows that markets are pricing in a 91.7% chance that the Federal Reserve will keep interest rates unchanged at its January 31 meeting. Around 8.3% expect the first cut already to take place.
  • The benchmark 10-year US Treasury Note trades near 3.89%, and looks to be forming a floor. With the BoJ now not hiking, US notes are gaining a few basis points

US Dollar Index Technical Analysis: Last days for Central Bank speakers

Central Banks are having busy days in this very last normal trading week of 2023. From left and right central bankers are pulling everything out of their toolkit to tweak earlier mismanaged monetary policy communication. For the Federal Reserve, several members are pushing back against the markets that cuts are not going to come that quick. Several ECB members are now also backtracking and saying that cuts will come for sure in 2024 after European Central Bank President Christine Lagarde surprised them by saying cuts are not under consideration at all, at last week’s meeting. The narrative is changing again, and could switch back in full in favour of the US Dollar Index (DXY).

Still, US Dollar bulls have their work cut out to salvage what was lost last week. On the daily chart, look for 103.00 as the first level to keep an eye on. Once trading above there, the 200-day SMA at 103.50 is the next important level to get to in its recovery. 

To the downside, the pivotal level at 101.70, the low of August 4 and 10 is vital to hold. Once broken, look for 100.82, which aligns with the bottoms from February and April. Should that level snap, nothing will stand in the way of DXY heading to the sub-100 region. 

Fed FAQs

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.