- The US Dollar falters in the face of a stronger Euro, as the European Central Bank (ECB) outperforms the Federal Reserve.
- On Wednesday, the sell-off was ignited by US Federal Reserve Chairman Jerome Powell, who affirmed the likelihood of rate cuts later this year.
- Consequently, the US Dollar Index broke through significant support levels, intensifying the selling pressure.
The US Dollar (USD) has retreated to the day’s low and may experience additional declines in the hours ahead. The primary catalyst on Thursday is the European Central Bank (ECB) meeting, during which Chairman Christine Lagarde notably refrained from discussing rate cuts. This contrasts with US Federal Reserve Chairman Jerome Powell’s testimony on Wednesday, where he affirmed the likelihood of rate cuts later in the year. This divergence positions the ECB’s rate decision as relatively hawkish, causing US yields to decline faster than European yields. Consequently, the Euro gains strength against the US Dollar, which holds a significant weight in the DXY composition, exceeding 50%.
On the economic calendar, most data has already been released, reinforcing the narrative that sentiment is shifting in the US. Both Challenger Jobcuts and weekly jobless claims have registered increases, and even the US Goods Trade balance depicts a growing deficit, viewed as a negative factor.
- US Challenger Job Cuts report for February rose from 82,307 to 84,638.
- The European Central Bank maintained its interest rates unchanged but lowered its inflation forecast for 2025 to 2%.
- Weekly Jobless Claims have been released: Initial Claims increased from 215,000 to 217,000. Continuing Claims also rose from 1.898 million to 1.906 million.
- US trade data for January revealed a widening Goods and Services Trade deficit to $67.4 billion from $64.2 billion. The Goods Trade deficit expanded from $90.2 billion to $91.6 billion.
- Unit Labor Costs data for Q4 decreased from 0.5% to 0.4%. Nonfarm Productivity remained steady at 3.2%.
- US Federal Reserve Chairman Jerome Powell returned to Capitol Hill for a second day of testimony before Congress. In his second opening remark, Powell mentioned that if the economy evolves as expected, cuts can commence this year.
- Fed Cleveland President Loretta Mester is scheduled to speak around 16:30 GMT.
- Equities have shifted away from the negative mood earlier on Thursday and are firmly in the green after the ECB confirmed that its monetary policy will start to unwind. Although rate cuts for 2024 were not discussed, markets were content to hear that it will happen eventually, even if that day is in 2025.
- According to the CME Group’s FedWatch Tool, expectations for a Fed pause in the March 20 meeting are at 95%, while chances of a rate cut stand at 5%.
- The benchmark 10-year US Treasury Note trades around 4.10%, the lowest level in over a week.
US Dollar Index Technical Analysis: ECB keeps lips sealed on cuts
The US Dollar Index (DXY) is currently positioned at a critical juncture, just above the pivotal 103.00 level and in proximity to the 55-day Simple Moving Average (SMA) at 103.28. A breach of this level could pave the way for a significant decline, potentially reaching down to 100.00. As the gap in the rate differential starts to narrow, there is a growing risk that other major currencies may gain strength, indicating potential prolonged weakness for the Greenback.
On the upside, the path to recovery for the Greenback appears challenging. The initial hurdle lies in reclaiming ground at the 200-day SMA near 103.73. Beyond that, the 100-day SMA presents a dual resistance at 103.85. The potential catalyst for a sustained upward movement depends on breaking through these levels, with 104.60 emerging as a crucial threshold on the topside.
The current state of the DXY is somewhat precarious, hovering around the 55-day SMA at 103.28. If a further decline ensues, 103.00 serves as the initial support, though closer attention should be paid to 101.75, a level of significant importance. A breach of this level could set the stage for another downward leg towards 100.61, marking the low point of 2023.
