Market Data 
- US Dollar traded fairly neutral on Monday, DXY index finds support at the 104.00 area.
- Markets are increasingly confident about a September rate cut.
- Jerome Powell was on the wires on Monday but didn’t provide any new insights on the policy outlook.
The US Dollar measured by the DXY maintains saw mild gains at the start of the week but remains at lows from April around 104.00. The USD softness is largely attributed to signs of disinflation in the US economy, which is fostering confidence in the markets for a potential Federal Reserve (Fed) rate cut in September.
Despite boosting market certainty of a rate cut, Fed officials are adopting a cautious stance by emphasizing that their decision remains highly reliant on data.
Daily digest market movers: USD under pressure due to weak inflation numbers, eyes on Powell
- Concerning the data releases, last week’s low inflation numbers have put the USD under significant pressure, amplifying the possibility of a September rate cut.
- Federal Reserve Chairman Jerome Powell is scheduled to speak at the Economic Club of Washington DC later in the sessions, with markets keenly awaiting any hints regarding future monetary policy actions.
- This week will also see significant commentary from other US policymakers in the run-up to the monetary policy meeting on July 31.
- The CME FedWatch Tool continues to show a high probability of a rate cut in September, currently standing at around 86% for a 25 bps cut.
- The US 10-year benchmark rate is currently at its lowest since April, at 4.20%.
DXY Technical Outlook: Bearish sentiment continues as DXY remains below the 200-day SMA
The outlook is negative for the USD with daily indicators, including the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD), deeply below the 50 mark, nearing the oversold threshold. In addition, the DXY index is trading at its lowest level since April, having lost the 200-day Simple Moving Average (SMA) support.
While it has lost more than 0.80% since the end of last week, a mild upward correction may be possible with the mentioned SMA at 104.40 as the main resistance to target.
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.
