- US Dollar displays strength ahead of Wednesday Fed decision and labor market data.
- Fed is expected to remain data-dependant but leave the door open for a September cut.
- Markets are extremely confident about a September cut of 25 bps.
The US Dollar represented by the DXY index charged forward on Monday despite looming uncertainties. The market remains on edge with September’s potential rate cut by the Federal Reserve (Fed) somewhat uncertain, but optimism surrounding the US economy’s strength is tempering anxieties. The Fed decision on Wednesday and labor market data will guide markets this week.
There is growing evidence of disinflation in the current US economic landscape, which solidifies the market’s belief in a prospective rate cut in September. However, the broader economy demonstrates strength, as is made evident by recent data surprises like the Q2 Gross Domestic Product (GDP) and July S&P Global PMIs, which might give the Fed reasons not to rush a rate cut.
Daily digest market movers: US Dollar firms ahead of July labor data and FOMC meeting
- Two-day FOMC meeting concludes on Wednesday with a plausible commitment to unchanged rates
- Market players recognize the solid performance of the US economy warrants no immediate action by the Fed, but the September FOMC meeting is predicted to bring a potential rate cut into the spotlight
- Chair Powell’s press conference has the potential to sway markets, but his precedent of focusing on labor market uncertainty is likely to continue
- In that sense, labor market data to be released throughout the week will guide market bets regarding the September decision
DXY technical outlook: Bearish signs stall as index inches toward 20-day SMA
Pushing past initial signs of struggle, DXY Index is now rebounding from the 200-day Simple Moving Average (SMA). The 20-day SMA is now viewed as the next target. However, key indicators such as the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD), though still in the red, are inching toward positive terrain.
Continued support is noted at 104.30 and 104.15 levels, while resistances are observed at 104.60 and 104.80 levels.
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.
