- The US Dollar ready to lock in a weekly gain after a rather boring PCE release.
- The weekend is expected to be an eventful one with Saturday, the US being set to impose tariffs on Mexico and Canada.
- The US Dollar Index (DXY) moves further away from 108.00 and resides near the fresh weekly high at 108.37.
The US Dollar Index (DXY), which tracks the performance of the US Dollar against six major currencies and currently trades at 108.35 at the time of writing, is heading higher on Friday after receiving quite a few tailwinds just ahead of the weekend. The first tailwind comes from US President Donald Trump, who announced a first wave of tariffs on Mexico and Canada. The Trump administration will impose 25% tariffs on about $900 billion in goods from both Canada and Mexico, Bloomberg reports. The US President also threatened to impose 100% tariffs on BRICS nations if they try to replace the US Dollar with a new currency in international trade.
The second tailwind comes from the rate differential between the US and several other countries. For example, this Friday the German inflation release boosted rate cut bets for the European Central Bank (ECB). This drives a bigger wedge between US yields and European ones, fueling a stronger US Dollar.
Unfortunately, the recent release of the Personal Consumption Expenditure (PCE) data for December was unable to further widen that rate differential. With all element roughly in line of expectations, the PCE release turned into a non-event.
Daily digest market movers: Monday open to get ugly
- Asian markets remain quiet this week due to the Lunar New Year, which started on Tuesday, with Chinese traders returning to the markets on February 5.
- Volatility and nervousness are expected at the opening trade on Monday if US President Trump finally unleashes 25% tariffs on Canada and Mexico.
- Trump reiterated on Thursday his threat of imposing 100% tariffs on BRICS nations if they try to replace the US Dollar (USD) with a new currency in international trade. Trump posted on TruthSocial: “We are going to require a commitment from these seemingly hostile countries that they will neither create a new BRICS currency, nor back any other currency to replace the mighty US Dollar or, they will face 100% tariff,” and continued “there is no chance that BRICS will replace the US Dollar in international trade, or anywhere else, and any country that tries should say hello to tariffs, and goodbye to America!”
- US Personal Consumption Expenditures (PCE) Price Index data for December has been released:
- Monthly headline PCE ticked up 0.2% from 0.1% in November, as expected.
- Monthly core PCE jumped to 0.3% from 0.1% the previous month, in line with estimates.
- Tthe Chicago Purchasing Managers’ Index for January came in at 39.5, a marginal miss on the 40 expected, coming from 36.9 in the prior reading.
- Despite the tariff threat, equities are positive with the US equity futures set for a positive open at the New York Opening Bell.
- The CME FedWatch tool projects an 82.0% chance for no change in the Fed’s policy rate for its next meeting on March 19.
- The US 10-year yield is trading around 4.50%, bouncing higher after hitting a fresh January low at 4.484% on Thursday.
US Dollar Index Technical Analysis: Monday is a blank cheque
The US Dollar Index (DXY) will face a shaky weekend while markets remain closed for business until Monday morning in Asia. With tariffs imposed on Canada and Mexico as earliest as Saturday, traders will be unable to move positions until Asian markets open, which means volatility is set to surge. Once the European session kicks in,the dust will start to settle on whichever event takes place over the weekend, with the DXY expected to remain caught between 107.30 to the downside and 109.30 on the upside.
Once 108.00 level has been acquired, the next level to pare back earlier losses is 109.30 (July 14, 2022, high and rising trendline). Further up, the next upside level to hit before advancing further remains at 110.79 (September 7, 2022, high).
On the downside, the 55-day Simple Moving Average (SMA) at 107.67 and the October 3, 2023, high at 107.35 acts as a double support to the DXY price. For now, that looks to be holding, though the Relative Strength Index (RSI) still has some room for the downside. Hence, rather look for 106.52 or even 105.89 as better levels.
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.
(This story was corrected on January 31 at 13:15 GMT to say ‘The US 10-year yield is trading around 4.524%, bouncing higher after hitting a fresh January low at 4.484% on Thursday.’, not ‘ at 4.484% on xxx.’)
