US Dollar shrinks with ECB’s Lagarde remaining silent on rate cuts versus Fed’s Powell committing for 2024
- The US Dollar turns back to session’s low with ECB meeting ended.
- US Federal Reserve Chairman Jerome Powell triggered a sell-off by confirming that rate cuts will come this year.
- The US Dollar Index snapped substantial support, increasing the selling pressure.
The US Dollar (USD) is back to session’s low and could eke out further losses in the coming hours. Main catalyst this Thursday is the European Central Bank (ECB) meeting where Chairman Christine Lagarde did not speak on rate cuts at all. This makes the ECB rate decision rather hawkish against US Federal Reserve Chairman Jerome Powell’s testimony on Wednesday where the Fed Chairman confirmed rate cuts are granted for this year. This sees yields in the US decline quicker than the European yields, and fuels a stronger Euro against the US Dollar, which is over 50% in the weighting of the DXY composition.
On the economic calendar front, most data came already came out and it is further confirming the picture that sentiment is turning in the US. Both the Challenger Jobcuts and the weekly jobless claims have ticked up. Even the US Goods Trade balance sees its deficit increasing, which is to be seen as a negative element.
- US Challenger Job Cuts report for February came in higher from 82,307 to 84,638.
- The European Central Bank kept its interest rates unchanged, though has cut its inflation forecast for 2025 to 2%.
- Weekly Jobless Claims have been released:
- Initial Claims jumped from 215,000 to 217,000.
- Continuing Claims jumped from 1.898 million to 1.906 million.
- US trade data for January got released as well:
- The Goods and Services Trade deficit widend to $67.4 billion from $64.2 billion.
- The Goods Trade deficit went from $90.2 billion to $91.6 billion.
- Unit Labor Costs data for Q4, went from 0.5% to 0.4%. Nonfarm Productivity remained steady at 3.2%.
- US Federal Reserve Chairman Jerome Powell heads back to Capitol Hill for a second day of testimony before Congress. Comments are expected to come in around 15:00 GMT.
- Fed Cleveland President Loretta Mester will speak near 16:30 GMT.
- Equities have forgotten the negative mood from this Thursday morning and are firmly in the green after the ECB confirmed as well that its monetary policy will start to unwind. Although rate cuts for 2024 were not discussed, markets were already happy to hear that it will happen one day, even if that day is in 2025.
- According to the CME Group’s FedWatch Tool, expectations for a Fed pause in the March 20 meeting are at 95%, while chances of a rate cut stand at 5%.
- The benchmark 10-year US Treasury Note trades around 4.09%, the lowest level in over a week.
US Dollar Index Technical Analysis: ECB overshadows Fed
The US Dollar Index (DXY) is trading at a crucial level, just above 103.00 and near the 55-day Simple Moving Average (SMA) at 103.28. Once that level gives way, it opens the door to a nosedive all the way to 100.00. With the rate differential gap starting to close, the risk is that the gap could flip in favor of other major currencies, which could mean longer-term weakness ahead for the Greenback.
On the upside, there is a long road to recovery for the Greenback, with the first reclaiming ground at the 200-day SMA near 103.73. Once broken through, the 100-day SMA is popping up at 103.85, so a bit of a double cap in that region. Depending on the catalyst that pushes the DXY back further upwards, 104.60 remains the key level on the topside.
It is a bit of an abyss for the DXY where it hangs at the moment, dangling around the 55-day SMA at 103.28. Should it move further away, 103.00 is the first thin line in the sand, though rather look for 101.75, which bears some pivotal relevance. Once through there, the road is open for another leg lower to 100.61, the low of 2023.
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.