- The US dollar index weakened towards 107.00.
- Profit-taking after November's sharp rally put pressure on the US dollar.
- Expectations of lower U.S. corporate tax rates and a wave of deregulation should increase foreign portfolios and FDI inflows to the United States.
The US Dollar Index (DXY) retreated from a two-year high on Friday, softening towards 107.00. Monday's session doesn't feature much of a focus on the US calendar.
The US Dollar Index (DXY) remains bullish despite recently falling back from two-year highs. Strong economic data and a less dovish stance from the US Federal Reserve are supporting the index's upward trajectory. Furthermore, the geopolitical turmoil caused by the Russia-Ukraine war also contributed to the upside.
Daily Digest Market Trends: USD holds firm despite pullback, Trump's policies could boost upside
- The US economy is strong and outperforming other developed countries.
- The policies proposed by President Trump are likely to prolong the Fed's restrictive policies, and the possibility of tax cuts and deregulation in the United States is expected to increase foreign investment.
- Real interest rates are expected to rise due to the favorable productivity environment in the United States.
- For the rest of this week, investors will be keeping an eye on gross domestic product (GDP) and personal consumption expenditure (PCE) data released on Thursday and Friday as they could shake up the US dollar's foundations.
- Thursday's unemployment claims numbers will also be important.
DXY technical outlook: index holds firm after pullback from highs, bullish bias remains
Technical indicators suggest a possible consolidation period due to overbought conditions, with the Relative Strength Index (RSI) declining from overbought levels and the Moving Average Convergence Divergence (MACD) histogram shrinking. . Despite the consolidation, the overall bullish trend remains unchanged with resistance at 108.00 and support in the 106.00-106.50 area. To maintain bullish momentum, bulls need to hold in this area.
Fed Frequently Asked Questions
Monetary policy in the United States is shaped by the Federal Reserve Board (Fed). The Fed has two responsibilities: achieving price stability and promoting full employment. The main tool to achieve these goals is to adjust interest rates. If prices rise too fast and inflation exceeds the Fed's 2% target, interest rates will be raised, raising borrowing costs for the entire economy. This makes the US a more attractive place for international investors to put their money, and the US dollar (USD) appreciates. If inflation falls below 2% or unemployment is too high, the Fed could lower interest rates to encourage borrowing, which would weigh on the dollar.
The Federal Reserve (Fed) holds eight annual policy meetings where the Federal Open Market Committee (FOMC) assesses economic conditions and decides on monetary policy. Twelve Fed officials will attend the FOMC meeting. Seven board members, the president of the New York Fed, and four of the remaining 11 regional reserve bank presidents will serve rotating one-year terms. .
In extreme circumstances, the Federal Reserve may resort to a policy called quantitative easing (QE). QE is a process by which the Fed significantly increases the flow of credit in a stalled financial system. This is a non-standard policy tool used in times of crisis or when inflation is extremely low. This was the Fed's weapon of choice during the Great Financial Crisis of 2008. This involves the Fed printing more dollars and using them to buy high-quality bonds from financial institutions. QE typically weakens the US dollar.
Quantitative tightening (QT) is the reverse process of quantitative easing, in which the Federal Reserve stops buying bonds from financial institutions and reinvests the principal of maturing bonds to buy new bonds. Never. It is usually positive for the value of the US dollar.
