US Dollar trades mildly positive as markets stay cautious ahead of upcoming CPI data
- Notable monetary divergence between Fed, G10 peers keeps USD afloat.
- Markets await further economic reports for insights into the US economy's health for potential adjustments to Fed expectations.
- Next week’s highlight will be April’s US CPI.
The US Dollar Index (DXY) is currently trading around the 105.35 mark, posting mild gains on Friday near the end of the trading week. The Greenback holds its ground but seems stuck as markets await drivers to continue placing their bets on the next Federal Reserve (Fed) decisions.
The US economy remains on shaky ground, and markets are expecting signs of decelerating inflation, which gives the Fed confidence to start cutting. In the meantime, the bank’s officials remain hawkish.
Daily digest market movers: DXY remains firm as markets digest Fed speaker's words
- San Francisco Fed President Mary Daly emphasizes need for prolonged restrictive policy to achieve Fed's inflation targets.
- Atlanta Fed President Raphael Bostic hinted at a possible economic deceleration. The exact timeline for rate cuts, however, remains uncertain in his view.
- Overall, Fed remains careful concerning initiation of easing policy. Despite a few Fed officials expecting a single rate cut this year, majority of market predictions foresee rate cuts starting in September. This conservative Fed strategy starkly opposes Powell's dovish indications from last week.
- Outcome of April’s Consumer Price Index (CPI) will be key for markets to continue shaping their expectations.
DXY technical analysis: DXY showcases mixed sentiment with both bulls and bears struggling for strength
The indicators on the daily chart are radiating a rather mixed picture. On one hand, the Relative Strength Index (RSI) plots a positive slope but remains in negative territory. This indicates that while the selling pressure is currently stronger, buying momentum is slowly creeping up, suggesting a potential shift in the near future.
Similarly, the Moving Average Convergence Divergence (MACD) sticks with flat red bars, indicating no strong impulse from either side.
The Simple Moving Averages (SMAs) also carry a mixed signal. Despite the DXY falling below the 20-day SMA due to bearish interference, it remains above both the 100-day and 200-day SMAs. This scenario indicates that while bears have been successful in shaping the short-term trajectory, bulls retain control over the medium to long-term trend.
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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