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US Dollar set to close 105.00 for this week after Friday’s decline

  • The US Dollar has thrived this week, though gives up part of its weekly gains.
  • Durable Goods revisions hurted the Greenback. 
  • The US Dollar Index trades back below 105.00 and could face more downturn next week.

The US Dollar (USD) is trading softer this Friday in the US Durable Goods aftermath. The revisions snapped the five-day winning streak for which the Greenback was on track for. As with the recent Housing data, Durable Goods are contracting for a second time in a row according to the revisions. 

On the economic data front, all eyes will now be on next week with the US Gross Domestic Product first reading for the first quarter of 2024. Add at the end of the week the Personal Consumption Expenditures (PCE) number on Friday, and the Greenback might be trading in another range again at the end of the week, should PCE further confirm disinflation being on track. 

Daily digest market movers: Inflation expectations retreat

  • Durable Goods Orders for April took the wind out of the sail from PMI’s on Thursday.
    • Orders got revised from 2.6 to 0.8 for the previous number.  The current number comes in lower at 0.7%.
    • Orders without cars and transportation fell flat from earlier 0.2% in the revision. The current number comes in at 0.4%.
    • It was only after the revisions came out, the Greenback started to ease. 
  • Around 13:35 GMT, Federal Reserve Governor Christopher Waller will deliver a keynote address at the Reykjavik Economic Conference in Iceland.
  • To round off this Friday, the University of Michigan has released its recent findings for May:
    • Consumer Sentiment went from 67.4 to 69.1. 
    • The 5-year inflation expectations index fell to 3.0% from 3.1%.
  • European equities are unable to save the situation for this Friday and are set to close in the red, while US equities are up near 0.5%.
  • The CME Fedwatch Tool is pricing 98.7% for no change in the policy rate for June. September futures are seeing more action where it is a neck-a-neck race with 53.2% chances for a cut against 46.2% for unchanged. A marginal 0.6% price in a rate hike.
  • The benchmark 10-year US Treasury Note trades around 4.49%, near the high for this week.

US Dollar Index Technical Analysis: The more data eases, the more pullbacks in DXY

The US Dollar Index (DXY) is surging again, nearly erasing all the losses from last week on the back of the disinflationary report. Still, the US Dollar Index is not out of the woods yet. It is still a long way to go to head to 106.00, and several economic data points are starting to retreat from their peak performances. 

Traders will need to ask themselves when the US is no longer exceptional in its economic performance against other countries. Is the Greenback then really earning to be back at 106.00 or higher, with the rate differential against its peer as a single main driver? Food for thought for traders over the weekend. 

On the upside, the DXY Index has broken two technical elements which were keeping price action in check. The first level was the 55-day Simple Moving Average (SMA) at 104.83 and the second was the red descending trend line crossed at 104.79 on Wednesday. From now further up, the following levels to consider are 105.12 and 105.52. 

On the downside, the 100-day SMA around 104.28 is the last man supporting the decline. Once that level snaps, an air pocket is placed between 104.11 and 103.00. Should the US Dollar decline persist, the low of March at 102.35 and the low from December at 100.62 are levels to consider.  

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.