US Dollar steadies ahead of the summer kickoff
- The US Dollar trades relatively flat despite USD/JPY near 160.00.
- All eyes will be on US Q1 GDP and PCE data for May as focal points this week.
- The US Dollar index pivots around June’s high.
The US Dollar (USD) is going sideways to a touch lower in the European trading session on Monday, with markets seeing headlines on the political difficulties around Europe fading into the background. This means some fading in the safe-haven flows into the Greenback. Some counterweight, though, comes from the Japanese Yen (JPY), which is devaluing further against the Greenback and has the 160.00 level in reach, where the Ministry of Finance of Japan intervened last time.
On the economic data front, there are some lighter numbers to start the week with, such as the Chicago Fed Activity Index for May and the Dallas Fed Manufacturing Business Index for June. Besides that, the US Treasury is heading back to markets to allot some US debt while US Federal Reserve Bank of San Francisco President Mary Daly will close off this Monday with some comments.
Daily digest market movers: Some minor optimism
- At 12:30 GMT, the Chicago Fed National Activity Index for May is set to be released. April’s number came in at -0.23, with no forecast available for the May number.
- At 14:30 GMT, the Dallas Fed Manufacturing Business Index for June will be unleashed. Previous print was at -19.4, with no forecast available.
- The US Treasury is set to auction a 3-month and a 6-month bill at 15:30 GMT.
- At 18:00 GMT, Federal Reserve Bank of San Francisco President Mary Daly delivers remarks and participates in a Q&A session with Deidre Bosa, "TechCheck" Anchor at CNBC.
- Equities are not breaking any pots on Monday, with minor gains and losses on the quote board. There are no real outliers to report during the European trading session.
- The CME Fedwatch Tool is backing a rate cut in September, with odds now standing at 59.5% for a 25 basis point cut. A rate pause stands at a 34.1% chance, while a 50-basis-point rate cut has a slim 6.4% possibility.
- The US 10-year benchmark rate is trading at 4.25%, rather steady since the end of last week.
US Dollar Index Technical Analysis: Watch out for USD/JPY
The US Dollar Index (DXY) is easing a touch on Monday, and while economic data will be very important again, as always, traders will need to have a hawkeye on the US Dollar against the Japanese Yen (USD/JPY) this week. With that forex pair trading near 160.00, markets are gearing up for possible intervention risk from the Japanese government. The last time the Japanese government intervened, the USD/JPY dove 5% lower, and the DXY dropped lower to 104.52.
On the upside, there are no significant changes to the levels traders need to watch out for. The first level to watch is 105.88, which triggered a rejection at the start of May and on Friday last week. Further up, the biggest challenge remains at 106.51, the year-to-date high from April 16.
On the downside, the 105.52 level is the first support ahead of the trifecta of Simple Moving Averages (SMA). First is the 55-day SMA at 105.20, safeguarding the 105.00 round figure. A touch lower, near 104.64 and 104.48, both the 100-day and the 200-day SMA form a double layer of protection to support any declines. Should this area be broken, look for 104.00 to salvage the situation.
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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