Market Data 
- The USD retreated on Friday after hitting yearly highs near 106.60.
- The market has responded to Fed Chair Powell’s comments with odds of a December cut falling to 60%.
- Retail Sales expanded by 0.4% in October vs. the previous month, surpassing expectations.
The US Dollar Index (DXY), which measures the value of the USD against a basket of six currencies, failed to secure a sixth consecutive day of gains in a volatile trading Friday. Federal Reserve (Fed) Chair Jerome Powell has instilled uncertainty in the markets by expressing reservations about a December interest rate cut, while markets assess fresh Retail Sales data.
The US Dollar Index retreated slightly after reaching its highest point of the year. However, DXY remains in an uptrend, bolstered by cautious Fed rhetoric and strong economic data, which gives the Greenback an advantage over its peers.
Daily digest market movers: US Dollar declines as markets assess Powell’s words and Retail Sales
- Fed Chair Powell downplayed the need for aggressive easing, citing economic strength.
- Fed officials, including Kugler, reiterated the need for caution in rate cuts.
- Market odds of a December cut have declined to 60% in fed funds futures and 45% in swaps markets.
- Swaps market anticipates a terminal rate above the Fed’s long-term rate of 2.875%.
- US Retail Sales expanded by 0.4% in October, exceeding expectations and surpassing September’s growth.
- Retail Sales Control Group contracted by 0.1%, while excluding Autos sales grew 0.1% MoM, below consensus.
DXY technical outlook: Bulls retreat as investors book profits
The DXY’s rapid surge to yearly highs above 107.00 was met with swift profit-taking, indicating a potential shift in market sentiment. The retreat suggests that buyers may have been overextended and a pullback could be in order.
Indicators including the Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD) continue showing overbought conditions, so it is likely that the consolidation will continue.
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.
