Market Data 
- The US Dollar turns flat at the start of the US trading session.
- Limited reaction as expected on the Retail Sales data.
- The US Dollar Index moves away from this year’s low, though a very marginal bounce.
The US Dollar (USD) trades flat on Tuesday, after spending most of the day in red digits with selling pressure at hand. The Federal Open Market Committee (FOMC) convenes on Tuesday to debate the upcoming US Federal Reserve’s (Fed) policy decision on Wednesday and how big the initial Fed’s interest rate cut will be. Then, the markets will finally hear from Fed Chairman Jerome Powell at the press conference.
On the economic data front, the Retail Sales did not really move the needle as such. It was expected that there would not be a substantial move with most traders keeping their powder dry for the Fed meeting on Wednesday. The Retail Sales came in, mostly in line of expectations and even the revisions were really marginal.
Daily digest market movers: Nothing to see here
- Retail Sales data for August did not really shake markets. Monthly Retail Sales grew by 0.1%, after growing by 1.0% in July which was revised to 1.1%. Sales excluding Cars and Transportation grew by a little 0.1%, from 0.4% the prior month.
- At 13:15 GMT, Industrial Production data for August saw a surprise uptick to 0.8%, coming from the contraction by 0.6% in July.
- At 14:00 GMT, Federal Reserve Bank of Dallas President Lorie Logan will deliver welcoming remarks at the Eleventh District Banking Conference in Dallas. Logan isn’t expected to talk about monetary policy because the Fed is within its blackout period ahead of its meeting on Wednesday.
- At that same time, 14:00 GMT, the National Association of Home Builders (NAHB) will release September’s Housing Market Index, with a steady 40 expected against the previous reading of 39.
- Japanese equities started their week after the bank holiday on Monday. Both the Topix and the Nikkei are down over 0.50%. European and US equities are looking in another direction and are heading in the green.
- The CME Fedwatch Tool shows a further declining chance of a 25 basis points (bps) interest rate cut by the Fed on Wednesday, by only 33.0%, further down from the 66% seen a week ago. Meanwhile, markets have increased the chances of a 50 bps cut to 67.0%. For the November 7 meeting, another 25 bps cut (if September is a 25 bps cut) is expected by 18.0%, while there is a 52.3% chance that rates will be 75 bps (25 bps + 50 bps) and a 29.7% probability of rates being 100 (25 bps + 75 bps) basis points lower compared to current levels.
- The US 10-year benchmark rate trades at 3.62%, bouncing off the 15-month low for now.
US Dollar Index Technical Analysis: Bounce for now
The US Dollar Index (DXY) respects the boundaries in which it has been trading during the last month, nearly the yearly lows. A very small bounce is noticeable on the chart, though it is not really running away from that lower band. The risk is that the DXY could snap below it when the Fed delivers its rate cut.
The upper level of the recent range is 101.90. Further up, a steep 1.2% uprising would be needed to get the index to 103.18, with the 55-day Simple Moving Average (SMA) at 102.89 on the way. The next tranche up is very misty, with the 200-day SMA at 103.81 and the 100-day SMA at 103.88, just ahead of the big 104.00 round level.
On the downside, 100.62 (the low from December 28, 2023) holds strong and has already made the DXY rebound two times in recent weeks. Should it break, the low from July 14, 2023, at 99.58, will be the next level to look out for. If that level gives way, early levels from 2023 are coming in near 97.73.
US Dollar Index: Daily Chart
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.
