US Dollar hits fresh two-year high ahead of PCE inflation

• The US Dollar hits another two-year high in Asian trading on Friday but retreats afterwards.
• Besides the US PCE inflation release, Quadruple Witching – the simultaneous expiration of four types of derivative contracts – will take place. 
• The US Dollar Index (DXY) reached 108.55 before facing some profit-taking. 

The US Dollar (USD) retreats slightly on Friday, with the DXY Index trading at around 108.20 after eking out another fresh two-year high of 108.55 during the Asian-Pacific trading session. The move was supported by rising US Treasury yields, widening the rate-differential gap with other countries. This means more support for the US Dollar because it becomes more valuable to invest in and get a nice return on your deposit.

Friday will be the last chance for traders to move any positions they might have with volatility set to spark up. That comes because of the so-called Quadruple Witching, which takes place four times per year – each third Friday of March, June, September, and December. During Quadruple Witching, four types of financial contracts expire simultaneously: stock index futures, stock index options, stock options, and single-stock futures. All these need to be rolled over, unwinded and settled, leading to a significant increase in trading volumes and sometimes volatility surrounding the main assets.

The US economic calendar is gearing up for the Federal Reserve’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) Price Index for November. Expectations are for no significant upticks in the monthly figures. After the Fed’s warning on sticky inflation, any upside surprise could make markets doubt further over changes of interest-rate cuts in 2025. 

Daily digest market movers: Volatile boost

• A government shutdown is still looming in the US. A vote in the House of Representatives failed to pass the stopgap bill. Vice-President-elect JD Vance will meet with the Freedom Caucus this Friday to try and get the liquidation of the debt limit proposed, according to Bloomberg News..
• President-elect Donald Trump, meanwhile, has shifted his focus to Europe by threatening with tariffs as well if the block does not make up its deficit in NATO by buying Oil and Gas from the US, Bloomberg reports . 
• Near 12:30 GMT, Federal Reserve Bank of San Francisco President Mary Daly is interviewed on Bloomberg Surveillance.
• • The Personal Consumption Expenditure (PCE) data for November is due near 13:30 GMT:
  • Monthly Headline PCE is expected to stay stable at 0.2%. The yearly gauge is seen heading to 2.5% from 2.3%.
  • The monthly Core PCE measure should soften to 0.2% from 0.3%. The yearly component is expected to tick up to 2.9% from 2.8%.
• Around 15:00 GMT, the final reading for the University of Michigan data will be published. The Consumer Sentiment Index for December should remain stable at 74. The 5-year inflation expectation rate should also be unchanged at 3.1%.
• Equities are rather seeing the Grinch taking over than enjoying a Christmas rally. All major indices are down across the globe. Europe sees its German Dax and Stoxx 50 decline by more than 1%. US equity futures see the Nasdaq nearly decline by 1% ahead of the US opening bell. 
• The CME FedWatch Tool for the first Fed meeting of 2025 on January 29 sees an 89.3% chance for a stable policy rate against a small 10.7% chance for a 25 basis points rate cut.  
• The US 10-year benchmark rate trades at 4.56%, a fresh seven-month high. 

US Dollar Index Technical Analysis: Final straw

The US Dollar Index (DXY) is gearing up for the last rather normal trading day in terms of volumes. After another strong performance, it looks like the US Dollar will remain orbiting around elevated levels before heading into the New Year. The sole element that could trigger some softness would be if a Christmas rally emerges in equities and leads to a retreat in yields, softening the Greenback. 

On the upside, a trend line originating from December 28 2023 looks to have foiled any further uptick moves for now after two firm rejections on Thursday and Friday. The next firm resistance comes in at 109.29, which was the peak of July 14, 2022, and has a good track record as a pivotal level. Once that level is surpassed, the 110.00 round level comes into play. 

The first downside barrier comes in at 107.35, which has now turned from resistance into support. The second level that might be able to halt any selling pressure is 106.52. From there, even 105.53 could come under consideration while the 55-day Simple Moving Average (SMA) at 105.23 is making its way up to that level. 

US Dollar Index: Daily Chart

US Dollar FAQs

What is the US Dollar?

The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.

How do the decisions of the Federal Reserve impact the US Dollar?

The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.

What is Quantitative Easing and how does it influence the US Dollar?

In extreme situations, the Federal Reserve can also print more Dollars and enact 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 when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.

What is Quantitative Tightening and how does it influence the US Dollar?

Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.