US Dollar extends retracement on Fed-packed Monday
- The US Dollar eases further at the start of a fresh week.
- The Greenback pulls back with risk on sentiment taking over.
- The US Dollar Index hovers around 104.50 and retreats further below.
The US Dollar (USD) is starting the week as it closed off the previous week: with some easing. Equities are on the front foot this Monday while commodities are trading higher, pushing the Greenback into some easing. Market volumes though might be a bit lighter than normal in the European trading hours with European markets closed for a bank holiday.
On the economic data front, traders are bracing for the Fed Minutes from the latest Federal Open Market Committee (FOMC) policy rate decision. Markets will be looking for clues or further confirmation on ‘how long’ steady for longer actually means. Ahead of the Minutes later this week, traders can brace for no less than five Fed speakers lined up for this Monday.
Daily digest market movers: Fed not putting a timestamp
- Market volume in European hours can be a big lighter with European markets closed for a bank holiday. Canada and India are closed for business as well.
- Markets are facing a slew of Fed officials for this Monday:
- At 12:15 GMT, Federal Reserve Bank of Atlanta President Raphael Bostic delivers welcome remarks at the Atlanta Fed's Financial Market Conference.
- Federal Reserve Vice Chair for Supervision Michael Bar delivers a keynote speech at the Atlanta Fed's Financial Market Conference at 13:00 GMT.
- Federal Reserve Governor Christopher Waller delivers welcoming remarks at the Third Conference on the International Roles of the US Dollar in Washington, DC, as well near 13:00 GMT.
- Near 14:30 Federal Reserve Vice Chair Phillip Jefferson delivers a speech about the US economic outlook and housing price dynamics at the Mortgage Bankers Association (MBA) Secondary and Capital Markets Conference in New York.
- To close off this Monday near 23:00 GMT, Federal Reserve Bank of Atlanta President Raphael Bostic (2024 voting member) delivers a keynote speech at the Atlanta Fed's Financial Market Conference dinner.
- Equities are shooting higher on Monday, with green numbers across the board and across the globe. Most Asian indices are even flirting with 1% gains for this Monday. US equity futures are rather mildly in the green, overall by less than 0.25%.
- The CME Fedwatch Tool suggests a 91.1% probability that June will still see no change to the Federal Reserve's fed fund rate. Odds have changed for September, with the tool showing a 49.0% chance that rates will be 25 basis points lower than current levels.
- The benchmark 10-year US Treasury Note trades around 4.41%.
US Dollar Index Technical Analysis: Can Fed officials support the DXY
The US Dollar Index (DXY) is easing at the start of this week, with markets picking up where they left off last week. Some more Dollar selling is taking place with traders heading out of safe havens and into risk assets, with equities and commodities sprinting higher. With a rather light economic data calendar ahead for this week, room for more risk on is present and could mean that the DXY slides below the 104.00 marker.
On the upside, several levels need to be regained again after Wednesday’s firm correction. The first is the 55-day Simple Moving Average (SMA) at 104.68, together with a pivotal level at 104.60. The next step up will be 105.12 and 105.52.
On the downside, the 100-day SMA around 104.11 is the last man standing to support the decline. Once that snaps, an air pocket is placed between 104.11 and 103.00. Should US Dollar outflows persist, the low of March at 102.35 and the low from January at 100.61 are levels to keep into consideration.
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.
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