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24 May 2024
US Dollar Index faces selling pressure at 20-day moving average despite strong Durable Goods Orders
- DXY Index is trading at 104.7, showcasing 0.35% losses.
- Durable Good orders from the US came in higher than expected but didn’t trigger movement from Greenback.
- Fed maintains cautious stance on premature easing, hinting at lower chances for swift interest rate cuts which cushions the USD.
The US Dollar Index (DXY) is currently trading at 104.7, experiencing some losses despite positive indications from the economy. This week, the US reported robust domestic economic indicators, such as the rising preliminary May PMIs reported by S&P Global, along with strong Durable Goods Orders and Jobless Claims figures, which suggest a potential continuation of the US Dollar's recovery. Despite these fundamentals, the DXY Index faces resistance at the 20-day Simple Moving Average and feels the effects of selling pressure.
As the US economy displays robust indicators, the Federal Reserve's (Fed) cautious stance on premature easing will limit any downward movement. Next week, April Personal Consumption Expenditures (PCE), the Fed's preferred gauge of inflation, will be released and might change the stance of the central bank’s messaging.
Daily digest market movers: DXY sees red despite signs of economic resilience in the US
- Durable Goods Orders in the US increased by 0.7% in April after March’s figures were revised down steeply to 0.8%. April’s reading exceeded market predictions, which expected a drop of 0.8%.
- Excluding transportation, a 0.4% rise was recorded in new orders. With defense set aside, new orders stayed almost unchanged.
- Fed remains mindful of premature easing with Fed members implying that the policy rate limitation will continue for a prolonged period. Market probabilities for a rate cut in the upcoming meetings are around 50% in September and 85% in November, with a cut priced in by December.
DXY technical analysis: DXY faces strong resistance at 20-day SMA
The DXY's technical outlook paints a mixed picture. The Relative Strength Index (RSI) is sloping downward within negative territory, hinting that selling momentum is underway. This negative slope implies bears gaining an upper hand in the short term. The Moving Average Convergence Divergence (MACD) displays flat red bars, which indicate steady buying pressure, adding more color to the bearish narrative.
Bulls, despite struggling, show their resilience as the DXY is clinging above the 100 and 200-day Simple Moving Averages (SMAs). This position above long-term averages indicates an underlying bullish bias. However, as long as it remains below the 20-day SMA, the short-term outlook will be painted with red.
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.