Market Analytics and Considerations
Key Notes
On the first trading day of the year, the US dollar index (DXY) declined among low volumes. The price fell to $103.44, the weakest after June 16 of 2022. Ever since high in 2022, it has decreased by nearly 10% as investors expect the Federal Reserve’s upcoming actions.
US bond yields are falling.
The drop in American bond yields and the DXY index movement are related. The yield on the 10-year government bond has fallen from its peak of 4.33% in 2022 to 3.87%. Its yield on 30-year government bonds decreased from 4.4percentage points to 3.9percentage points throughout the same time period. These yields are still very near their peak level in over 10- year period.
What the market anticipates the Fed to do is reflected in the functioning of the bond market. The Fed voted to raise interest rates by 0.50percentage points during its meeting held in December. Then, despite the fact that inflation fell for the second consecutive month, it made a suggestion that it would keep raising rates in 2023. The Bureau of Labor Statistics reports that in November, the overall consumer inflation rate dropped to 7.3%.
As a result, traders’ expectations that the Fed will be less aggressive than it was in 2022 have caused the US dollar index to drop. It started its quantitative tightening policy, which includes shrinking its balance sheet, and increased interest rates by 450 basis points.
Lower expectations for inflation
As optimism about continued declines in American inflation grew, the DXY index started to decline. The closely monitored 10-year breakeven rate has decreased from a peak of 2.98percentage points in April 2022 to the present value of 2.30%. This crucial number measures anticipated inflation based on Treasury Constant Maturity Securities.
Because of a substantial reversal in the factors that contributed to inflation in 2022, inflation will probably keep decreasing. For instance, freight prices have dropped to their lowest level in years, reducing supply chain interruptions. As demand for technology decreased at this time, huge stockpiles, particularly in semiconductors, increased.
Projection for the US dollar index
The DXY index has been in a significant downtrend for the past few weeks, according to the graph. It was able to move underneath the 38.2% Fibonacci Retracement mark as it fell. In addition, oscillators have continued to fall whereas the 50-day & 100-day moving averages have made a bearish confluence.
The US dollar index thus has a bearish outlook, w $100 being the next important support area to keep an eye on. The pessimistic outlook will be refuted by a move above the significant resistance level at $105 in price.
