On the economic front, a light release calendar is on the cards, with only the weekly Mortgage Applications numbers expected. From the commodity side, the US Energy Information Administration (EIA) will release Crude Oil and derivatives numbers. This release will get some additional attention as Western Texas Intermediate (WTI) crude price went on a wild ride on Tuesday, by first dropping 3.10% during the European session and then rallying 4% during the US trading session.
Daily digest: US Dollar in a state of nirvana
- Markets faced the first and only piece of macroeconomic data out of the US at 11:00 GMT with the weekly Mortgage Bankers Association (MBA) Mortgage Applications dropping to -3.1% from -3.0% previous week.
- The US Treasury Department is about to tap the markets for a 10-year note auction. As the 10-year tenor acts as an important benchmark, expect some additional attention to any bid/cover ratios and demanded yields.
- Expect a bit of fireworks from the US Energy Information Administration (EIA) Crude Oil numbers. Western Texas Intermediate (WTI) crude price moved over 7% in intraday volatility on Tuesday, and as recession fears are fading on Wednesday, a drop in stockpile could fuel a pop higher in the Crude Oil price.
- Stocks are rebounding a bit with the Hang Seng unchanged and European equities on the front foot. Both the German DAX and the European Stoxx 50 are paring back losses from Tuesday. US equity futures are in good shape to have a green Wall Street opening.
- The CME Group FedWatch Tool shows that markets are pricing in an 86.5% chance that the Federal Reserve will pause interest rate hikes at its meeting in September.
- The benchmark 10-year US Treasury bond yield trades at 4.01% and is trading higher after the drop below 4% intraday on Tuesday. The risk aversion from Tuesday seems to be in the rear mirror and US bonds are no longer heavily bid.
US Dollar Index technical analysis: bears and bulls looking at each other
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.
The US Dollar (USD) is stuck in a very tight range this Wednesday as a very light trading day bears no catalysts which could move the needle in any direction. A mix of events on Tuesday – with lackluster import/export data out China together with resparked recession fears, and the 40% tax on profits for Italian banks – served a risk averse cocktail which fueled the rally in the Greenback across the board in every major G10 pair. The very light economic calendar and the US Consumer Price Index (CPI) numbers on Thursday will see traders sitting on their hands for Wednesday in order to keep their powder dry for the main event.
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.
For the upside, 102.45 – where the 55-day SMA is located – is the next key level to have a daily close above in order to advance in a solid way. The fact this technical indicator already got breached below means that it misses buying-interest. In case the US Dollar Index is able to head back above it, look for 103 and a new monthly high to be at hand.
The US Dollar made it through a very difficult area on the US Dollar Index (DXY) chart. The region with both the 100-day and the 55-day Simple Moving Average (SMA) has been broken to the upside and must have hurt quite a few US Dollar bears in the process. With the US Dollar retracing a little bit on Wednesday, it will be important to see if the 100-day SMA at 102.31 will be able to refrain the DXY from paring back all gains from Tuesday.
On the downside, the US Dollar bulls will want to defend that earlier mentioned 100-day SMA at 102.31, in order to avoid a full paring back of earlier gains for this week. If bulls fail to do so, expect to see a nosedive move toward 102.00. The low of past Friday at 101.74 could be a line in the sand to predict if more downside is to come, once it is being tested.
- The US Dollar is unchanged near the New York opening bell.
- Very light data calendar points to a rather uneventful day in the wake of US inflation data on Thursday.
- The US Dollar Index nudges lower, eyes key support test.
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.
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.