US Dollar trades on backfoot, investors eye FOMC minutes and incoming data

Source Fxstreet
May 21, 2024 16:07
  • Dollar Index trades at 104.6, registering mild losses in Tuesday's trading.
  • USD is trading sideways as a cautious Fed is hesitant on premature easing.
  • The odds of a cut in September slightly decrease but remain high.

The US Dollar Index (DXY) is seen at 104.6 level on Tuesday with mild losses. Amid signals of robust growth and persistent inflation in the US, Federal Reserve (Fed) officials continue to express caution about premature easing. The market's focus is steadily shifting toward the forthcoming release of the Federal Open Markets Committee (FOMC) Minutes on Wednesday and mid-tier data on Thursday and Friday including S&P PMIs and Durable Goods Orders.

As long as the US economy continues its robust growth while enduring inflation, Fed officials will lean toward caution, which could limit the downside for the USD.

Daily digest market movers: DXY mildly down as markets await FOMC Minutes

  • Fed officials express concerns over rushing into easing amidst relaxed financial conditions and continuously advocate for a cautious approach toward rate cuts.
  • Market predictions currently suggest a 75% chance of a rate decrease during the Fed's September meeting, odds that are mildly lower after being priced in last week.
  • Any fresh clues on the May FOMC Meeting Minutes or the outcome of May’s S&P PMIs or April Durable Goods orders might generate volatility in the USD dynamics.

DXY technical analysis: DXY’s balance between bulls and bears persists, while investors await direction

The indicators on the daily chart reflect a state of equilibrium for the US Dollar Index. The Relative Strength Index (RSI) remains flat, indicating no clear dominance between buying and selling momentum. However, It remains in negative territory, which could suggest an overall bearish bias, but not decidedly so. The Moving Average Convergence Divergence (MACD) shows flat red bars, hinting at bearish sentiment remaining steady.

Despite the increased selling pressure pushing the pair below the 20-day Simple Moving Average (SMA), it continues to stay above the 100 and 200-day SMAs. While the market appears to await direction, the ability of the Index to maintain above the 100 and 200-day SMAs shows persistent demand each time the DXY dips, highlighting a bigger bullish picture.

 

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.

 

Disclaimer: For information purposes only. Past performance is not indicative of future results.
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