Market Data 
- After a shaky Monday, the USD recovered, and Tuesday is unlikely to see much movement.
- Amid renewed market sentiment, US Dollar (DXY) gains and remains near the 103.00 mark.
- The market is pricing in a 100 bps rate cut by year-end.
On Tuesday, the US Dollar (USD), measured by the DXY Index, is capitalizing on recent recovery gains near the 103.00 mark subsequent to an improvement in market sentiment. In addition, caution due to absent news about the Middle Eastern conflict between Iran and Israel is also backing the Dollar’s current position. However, the Greenback’s trajectory throughout the day could potentially be limited by the high dovish bets on the Federal Reserve (Fed).
Markets are seeing that the US economic outlook is weak due to July’s soft data and seem to be fearing a recession, while officials are asking the public not to overreact to one data point.
Daily digest market movers: USD upside limited as markets price in 100 bps Fed easing by year-end
- Despite the USD gains, its potential is limited by the steady dovish bets on the Fed.
- Market anticipates a rate cut in September, leading to subsequent USD weakening.
- In addition, market is pricing in a 100 bps rate cut by year-end, with some odds of an additional 25 bps.
- Over 200 bps of total easing is priced in for the coming year, barring a deep US recession.
- Market anxiously awaiting incoming data to assess Fed easing narrative.
DXY technical outlook: Bulls step in, but bears still command
On the technical side, the DXY outlook turned bearish after a sharp decline in the Relative Strength Index (RSI), which fell into oversold territory in the last few trading sessions but seemed to recover on Tuesday. However, the outlook remains bearish, with the index still trading below the 20, 100 and 200-day Simple Moving Averages (SMAs).
Supports: 102.50, 102.20, 102.00
Resistances: 103.00, 103.50, 104.00
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.
