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US Dollar holds its ground, FOMC policy meeting starts


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  • US Dollar starts the month of May on a firm footing, gathers strength against its major rivals.
  • US Dollar Index climbed to its highest level in three weeks above 102.0.
  • Federal Reserve’s policy meeting could significantly influence the US Dollar’s valuation this week.

The US Dollar gathered bullish momentum on Monday and the US Dollar Index (DXY) rose more than 0.5% on a daily basis, fueled by a more than 4% increase seen in the benchmark 10-year US Treasury bond yield. The DXY continues to push higher on Tuesday and trades at its strongest level since April 11 above 102.00.

The Federal Reserve’s (Fed) two-day policy meeting gets underway on Tuesday and the policy decisions will be announced on Wednesday. Although markets are fairly certain that the Fed will raise its policy rate by 25 basis points (bps) to the range of 5%-5.25%, the language in the policy statement regarding a pause in the tightening could influence the USD’s valuation significantly. Ahead of this event, March Factory Orders and JOLTS Job Openings data from the United States (US) will be watched closely by market participants on Tuesday. 

Daily digest market movers: US Dollar stays resilient ahead of Fed policy announcements

  • The data published by the US Census Bureau revealed on Tuesday that new orders for manufactured goods, Factory Orders, increased $4.9 billion, or by 0.9%, to $539 billion in March.
  • The US Bureau of Labor Statistics (BLS) announced that the number of job openings on the last business day of March stood at 9.59 million, compared to 9.97 million in February. This reading came in below the market expectation of 9.77 million.
  • Wall Street’s opened in negative territory on Tuesday with the Dow Jones Industrial Average losing nearly 1% on a daily basis. 
  • The ISM Manufacturing PMI improved slightly to 47.1 in April from 46.3 in March. This reading showed that the contraction in the manufacturing sector’s activity continued, albeit at a softer pace.
  • The ISM’s survey further revealed that the Price Paid sub-index, the input inflation component, climbed to 53.2 from 49.2, playing into the hawkish Fed narrative.
  • Previewing the FOMC event, “we anticipate that post-meeting communication will: (i) emphasize that disinflation has been evolving slower than expected, leaving open the possibility of additional tightening, and (ii) acknowledge the more uncertain economic environment, especially with regard to credit conditions post SVB collapse,” said TD Securities analysts.
  • The CME Group FedWatch Tool shows that markets are pricing in a 96% probability of a 25 bps Fed rate increase on Wednesday.
  • US regulators seized First Republic Bank and agreed to sell a majority of its assets to JPMorgan Chase & Co. Last week, the bank reported that there were more than $100 billion of deposit outflows in the first quarter.
  • The data from the Eurozone showed on Tuesday that the annual Core Harmonized Index of Consumer Prices (HICP) declined to 5.6% in April from 5.7% in March.
  • The European Central Bank (ECB) noted in its Bank Lending Survey that a net 38% of Eurozone banks reported a fall in demand for credit from companies in the first quarter of the year.
  • “The general level of interest rates was reported to be the main driver of reduced loan demand, in an environment of monetary policy tightening,” the ECB explained in its publication, weighing on EUR/USD.
  • The ECB will announce its monetary policy decisions on Thursday.

Technical analysis: US Dollar Index near-term bullish bias stays intact

The US Dollar Index (DXY) closed above the 20-day Simple Moving Average (SMA) for the first time since mid-March on Monday. Moreover, the Relative Strength Index (RSI) indicator recovered above 50, pointing to a bullish shift in the short-term outlook. 

On the upside, the DXY faces interim resistance at 102.60 (static level) ahead of 103.00/103.20 area, where the 50-day and the 100-day SMAs are located. A daily close above the latter could bring in additional buyers and open the door for an extended rally toward 104.00 (psychological level). 

102.00 (former resistance, static level, 20-day SMA) aligns as first support. If DXY fails to hold above that level, 101.50 (static level) and 101.00 (psychological level) could be seen as next bearish targets.

US Dollar FAQs

What is the US Dollar?

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.

How do the decisions of the Federal Reserve impact the US Dollar?

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.

What is Quantitative Easing and how does it influence the US Dollar?

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.

What is Quantitative Tightening and how does it influence the 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.