US Dollar extends gains as China hangs in the ropes
- The US Dollar is in the green against nearly every G20 peer on the quote board.
- Traders are finally starting to hedge in volume for a possible Trump win in November.
- The US Dollar Index breaks above a key level on its way to 104.00.
The US Dollar (USD) adds to gains for a fifth consecutive day when looking at the US Dollar Index (DXY), which can be seen as the benchmark for the Greenback’s performance. China’s Housing Minister said on Thursday that the country will open a 4 trillion Yuan (CNY) funding to support its domestic housing market, a quite lower number than the initial 6 trillion Yuan communicated on Monday, and adds to momentum for the United States (US) former President Donald Trump to take more lead in the polls in the run-up to the November 5 Presidential Elections day.
The US economic calendar is full on Thursday. Besides the usual weekly Jobless Claims, Retail Sales and several leading indicators will be released about the US economy and activity. In case that is not enough, the European Central Bank (ECB) is set to deliver another 25 basis point (bps) rate cut according to consensus, with the main question if ECB President Christine Lagarde dares to deliver a hawkish rate cut while Europe’s economic engine, Germany, is severely stuttering.
Daily digest market movers: A lot of data to read through
- The US calendar kicks off at 12:30 GMT with a bulk release of data:
- The weekly Jobless Claims:
- Initial Claims for the week ending on October 11 are expected to remain stable at 258,000, as the previous week.
- The Continuing Claims for the week ending on October 4 are expected to increase to 1.87 million from the prior 1.861 million.
- IT will be interesting to see how the hurricanes in Florida and the Gulf region have influenced the claims numbers.
- September Retail Sales:
- The monthly headline Retail Sales is expected to rise by 0.3%, compared to 0.1% in the previous reading.
- The monthly Retail Sales, excluding cars and transportation, should grow at a steady pace of 0.1%.
- The Philadelphia Fed Manufacturing Survey for October is expected to tick up to 3.0, coming from 1.7 in September.
- The weekly Jobless Claims:
- At 13:00 GMT, Federal Reserve (Fed) Bank of Chicago President Austan Goolsbee delivers welcoming remarks at the Fifth Annual Exploring Career Pathways in Economics and Related Field Conference.
- At 13:15 GMT, the Fed releases the Industrial Production data for September, which is expected to shrink by 0.2% against the growth of 0.8% seen in August.
- At 14:00 GMT, the National Association of Home Builders (NAHB) will release its monthly Housing Market Index for October. The expectation is for an uptick to 43 against the 41 from September.
- The European Central Bank (ECB) will release its rate decision at 12:15 GMT, followed by a press conference where ECB President Christine Lagarde will deliver a speech and take Q&A around 12:45 GMT.
- Equities in Asia are seeing investors being disappointed with a tepid reaction to China's supportive measures on its domestic housing sector. Both Japan’s and China’s equity indices have closed in the red. European equities are doing better with hopes from traders for a rate cut from the ECB, while US futures are trading flat to mildly higher.
- The CME Fed rate expectation for the meeting on November 7 shows a 92.1% probability of a 25 bps rate cut, while the remaining 7.9% is pricing in no rate cut. Chances for a 50 bps rate cut have been fully priced out.
- The US 10-year benchmark rate is trading at 4.04% after having flirted with a break below 4% on Wednesday.
US Dollar Index Technical Analysis: The Trump protection
The US Dollar Index (DXY) is rallying with more and more headlines and media channels, starting to pick up on a possible Trump win in the US presidential elections in November. It looks like that trading desks are starting to hedge for that event, with the risk that the US Dollar will continue to rally into the event and can only reverse once it is done, no matter who won. Thus, a big attention point is that the DXY might become a “buy the rumour, sell the fact” event in the coming weeks.
A firm resistance is ahead at 103.79, which aligns with the 200-day SMA. Above that, there is a small gap before hitting the pivotal level at 103.99 and the 104.00 big figure. Should Trump further lead in the polls, a rapid swing up to 105.00 and 105.53 could be on the cards.
On the downside, the 100-day SMA at 103.20 and the pivotal level at 103.18 are now acting as support and should prevent the DXY from falling lower. With the Relative Strength Index in overbought territory, a test on this level looks granted. Further down, the 55-day SMA at 101.84 and the pivotal level at 101.90 should avoid further downside moves.
US Dollar Index: Daily Chart
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.
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