- US Dollar regained some ground after Jerome Powell’s comments.
- Market retains confidence in a September rate cut.
- Investors await June’s CPI snapshot of US inflation on Thursday.
The US Dollar staged a minor comeback and the DXY rose to 105.20, courtesy of Federal Reserve (Fed) Chairman Jerome Powell’s recent congressional comments, which shied away from embracing rate cuts in the immediate future, advocating for patience instead.
Tinged with disinflation indicators, the US economic outlook has raised hopes of a September rate cut. That said, Fed officials are in no rush to implement cuts, choosing instead to rely on data-centric indicators before making such decisions.
Daily digest market movers: DXY up as markets assess Powell’s words
- Fed Chair Jerome Powell’s Semiannual Monetary Policy Report to Congress and his testimony before the Senate Banking Committee are the standout events on Tuesday.
- Powell re-emphasized the need for encouraging economic data to shore up the Fed’s confidence in managing inflation effectively.
- He underscored that it is not only high inflation that poses a risk but is apprehensive about announcing a rate cut until there is assured evidence that inflation is consistently gravitating toward the 2% target.
- However, he stressed the importance of meeting-by-meeting policy decisions, admitting that while progress has been made toward the 2% inflation goal, the recent data needs to be more encouraging to warrant a rate cut.
- US Consumer Price Index (CPI) arrives on Thursday and will be closely watched by market participants.
- YoY CPI headline inflation is forecasted to decelerate by two points to 3.1%, and the core reading is expected to hold steady at 3.4%.
- As per the CME FedWatch Tool, the probability of a rate cut in July remains below 10% but at approximately 80% for September.
DXY technical outlook: Recovery seems possible as DXY stays above 100-day SMA
While technically speaking the DXY experienced a downturn, losing 0.80% in value and slipping below its 20-day Simple Moving Average (SMA) last week, some recovery is now detected above the 100-day SMA. Both the Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD) indicators have retreated into negative territory but are presenting better and gained momentum on Tuesday.
Nevertheless, the 104.78 zone, denoted by the 100-day SMA, has held strong, repelling sellers and thereby reestablishing support. Below there, the 104.50 and 104.30 zones could potentially act as robust backstops against further declines.
US Dollar FAQs
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.
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.
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.
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.
