US Dollar holds its ground following Thursday’s decisive rebound.
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- US Dollar holds its ground following Thursday’s decisive rebound.
- US Dollar Index stays near 102.00, looks to post strong weekly gains.
The US Dollar benefited from souring risk mood on Thursday and registered strong gains against its major rivals. Markets stay relatively quiet early Friday and the US Dollar Index (DXY) consolidates its weekly gains.
Although there will not be any high-tier macroeconomic data releases from the United States ahead of the weekend, market participants will keep a close eye on headlines surrounding the banking crisis and the debt ceiling. Nevertheless, the US Dollar remains on track to register its best weekly performance since mid-March.
The US Dollar Index (DXY) climbed above 102.00 for the first time on Thursday and closed the day above the 20-day Simple Moving Average after having failed to do so earlier this week. 102.50 (50-day SMA) aligns as the next bullish target for the DXY ahead of 103.00 (psychological level, 100-day SMA) and 103.60 (static level from February).
Meanwhile, the Relative Strength Index (RSI) indicator on the daily chart rose slightly above 50, pointing to a buildup of bullish momentum.
On the downside, 101.65 (20-day SMA) forms first support. A daily close below that level could attract sellers and open the door for an extended decline toward 101.00 (static level, psychological level) and 100.00.
The US Federal Reserve (Fed) has two mandates: maximum employment and price stability. The Fed uses interest rates as the primary tool to reach its goals but has to find the right balance. If the Fed is concerned about inflation, it tightens its policy by raising the interest rate to increase the cost of borrowing and encourage saving. In that scenario, the US Dollar (USD) is likely to gain value due to decreasing money supply. On the other hand, the Fed could decide to loosen its policy via rate cuts if it’s concerned about a rising unemployment rate due to a slowdown in economic activity. Lower interest rates are likely to lead to a growth in investment and allow companies to hire more people. In that case, the USD is expected to lose value.
The Fed also uses quantitative tightening (QT) or quantitative easing (QE) to adjust the size of its balance sheet and steer the economy in the desired direction. QE refers to the Fed buying assets, such as government bonds, in the open market to spur growth and QT is exactly the opposite. QE is widely seen as a USD-negative central bank policy action and vice versa.
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