Market Data 
- The US Dollar sees its rally stalling and even reversing after the November Retail Sales release.
- Traders were too impressed after US Services PMI print, which made it unable for Retail Sales to impress again.
- The US Dollar Index (DXY) is sliding away from 107.00 and dips lower.
The US Dollar (USD) sees its rally stall and take a turn for the worse with the US Retail Sales number throwing a spanner in the works. With a print of 0.7%, beating the 0.5% estimate for November, the print is less impressive as it was on Monday with the US Services Purchase Managers Index (PMI). Even the revision of the previous number to 0.5%, from 0.4% was unable to make traders pop the champagne and add to their US Dollar positioning. Instead, the US Dollar is starting to pare back some gains on the day.
Meanwhile, the Federal Reserve is set to cut its policy rate on Wednesday by 25 basis points – offering a small goldilocks scenario for this week – but increasing expectations that the Fed will slow down its rate-cutting cycle in 2025 keep the USD supported.
In Europe, German Chancellor Olaf Scholz lost its vote of confidence on Monday and snap elections are set for February 23. Political instability in Germany, together with the recent woes in France, is resulting in a weaker Euro (EUR), which accounts for 57.6% of weight in the US Dollar Index (DXY).
Daily digest market movers: Failed to meet expectations
- The November Retail Sales rather triggered some disappointment:
- The monthly Retail Sales grew by 0.7%, beating the 0.5% estimate. The previous number got revised up to 0.5%, from 0.4%.
- Retail Sales excluding Cars and Transportation fell to 0.2%, missing the 0.4% estimate and saw the previous month revised to 0.2%, from 0.1%.
- Seeing the marginal revisions and the small beat and miss in the recent numbers, traders apparently are less inclinded for now to boost their conviction in the US Dollar further.
- Industrial Production for November remains in contraction by 0.1%, unable to move up while concensus was foreseen for an expansion by 0.3%.
- The National Association of Home Builders (NAHB) will release its Housing Market Index for December at 15:00 GMT. The expectation is for a tick up to 47 from 46 a month earlier.
- Equities remain sluggish halfway throgh this Tuesday with Asian and European indices on the back foot. US futures are showing signs of fatigue as well and are down by less than 1.0%.
- The CME FedWatch Tool is pricing in another 25 basis points (bps) rate cut by the Fed at Wednesday’s meeting by 95.4%.
- The US 10-year benchmark rate trades at 4.38%, retreating from an earlier fresh three-week high at 4.43%
US Dollar Index Technical Analysis: There is that range again
The US Dollar Index (DXY) is ticking back up to 107.00 while under the hood of the engine, the bond complex is being torn apart. While investors are selling US bonds – which is triggering a spike in yields – the Federal Reserve is set to cut rates by 25 basis points on Wednesday. Markets are doing their own homework and are already factoring in the effect from Donald Trump’s policies, which could lead the Fed to hold rates or even hike them again in order to keep the economic boost and boom under control.
On the upside, 107.00 remains a key level that needs to be reclaimed with a firm daily close above it before considering 108.00. When and if that finally happens, the fresh two-year high at 108.07 from November 22 is the next level to watch for.
Looking down, 106.52 is the new first supportive level in case of profit-taking. Next in line is the pivotal level at 105.53 (the April 11 high), which comes into play before heading into the 104-region. Should the DXY fall towards 104.00, the 200-day Simple Moving Average at 104.19 should catch any falling knife formation.
US Dollar Index: Daily Chart
Fed FAQs
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.
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.
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.
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.
