US Dollar rally tempered to start week, gains expected to continue
- DXY rally sees minor pullback on Monday but is set to continue its upward journey this week.
- Fed maintains that only one rate cut is expected in 2024, conflicting with market expectations.
- US Treasury yields continued rising, gaining more than 1% on Monday.
On Monday, the US Dollar Index (DXY) experienced some pullback but maintained overall strength. Tracking the previous week's performance, the DXY was influenced by the hawkish Federal Reserve (Fed) and the risk-off impulses from Europe. These two driving factors are expected to continue influencing the Index, allowing the US Dollar rally to proceed. It's worth noticing that the Index, on Friday, closed at its highest level since early May and is expected to retest the April-May highs near 106.50.
The US economic outlook persists in a state of ambiguity. The Fed continues to keep its economic indicator projections unchanged but revised its forecast for Personal Consumption Expenditures (PCE) higher. Primarily, soft inflation levels combined with a robust labor market illustrate the mixed dynamic of the US economic landscape.
Daily digest market movers: DXY slightly pulls back after strong week
- Fed perceives only one rate cut in 2024 compared to the market's prediction of two. This discrepancy will be influenced heavily by emerging financial data.
- Investors are awaiting critical reports, namely June's Consumer Price Index (CPI) and PCE, which will be key for timing of interest rate cuts. The odds of a cut at the July meeting remain low at 10%.
- An upcoming cut will also depend on July’s CPI and PCE, ahead of the Fed's meeting on September 17-18. The odds for a rate cut at this meeting are currently near 75%.
- US Treasury yields are following an uptrend, with the 2, 5 and 10-year yields reported at 4.47%, 4.30%, and 4.28%, respectively, with large gains.
DXY technical analysis: Bulls pause, outlook still positive
The technical indicators presented a pause in Monday's session but maintained an overall positive standpoint. The Relative Strength Index (RSI) continues to hold above the 50 level, and the Moving Average Convergence Divergence (MACD) continues to present green bars. This implies that the bulls remain strong, which leaves the door open for additional gains.
Furthermore, the DXY remains above its 20, 100 and 200-day Simple Moving Averages (SMA), which combined with investors taking a breather supports a bullish stance for the DXY.
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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