US Dollar advances after ECB dovish outlook, US Retail Sales
- Fed easing expectations continue to evolve, two cuts by year-end are nearly priced in.
- September Retail Sales surprised to the upside, weekly jobless claims fell.
- ECB’s Lagarde has concerns about the EU economic outlook, which is benefiting the USD.
The US Dollar Index (DXY), which measures the value of the USD against a basket of six currencies, has continued its upward trajectory, marking its fifth consecutive day of gains. At press time, the DXY trades near 104.00.
This surge comes after the European Central Bank (ECB) President, Christine Lagarde, expressed concerns over the Eurozone economic outlook, prompting fears that the region could face further economic weakness. In addition, positive data from the US, including Retail Sales and weekly Initial Jobless Claims, benefited the USD.
The US economy has lately shown signs of economic resilience, while the markets continue to price in high odds of two cuts before the end of the year.
Daily digest market movers: US Dollar rises after positive data, easing bets increase
- Fed easing expectations have increased with markets now pricing in two cuts by year-end and 150 bps of total easing over the next 12 months.
- Robust economic data, including strong US Retail Sales and a healthy labor market, continue to support a resilient economic outlook.
- US Retail Sales surprised to the upside in September, increasing 0.4% to reach $714.4B and exceeding market expectations. In August, US Retail Sales arrived at a weaker 0.1%.
- US citizens filing new applications for unemployment insurance hit 241K for the week ending October 11. This was below consensus of 260K and the previous week's tally, which was revised upward to 260K.
DXY technical outlook: DXY maintains bullish momentum
The DXY index maintains bullish momentum with indicators continuing to gather strength. The index has crossed above the crucial 100-day Simple Moving Average (SMA) and is targeting the 200-day SMA at 103.80. If this level is breached, it would further enhance the bullish outlook. However, overbought signals from indicators suggest a potential correction
Support lies at 103.00, 102.50 and 101.30, while resistances are at 103.30, 103.50 and 104.00. Overall, buyers remain in control, but caution is advised due to overbought conditions.
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.