US Dollar sees some gains following Retail Sales data
- US Retail Sales saw a slight uptick in June.
- USD's overall outlook still remains skewed to the downside due to dovish bets on the Fed.
- Markets remain confident about a September cut.
On Tuesday, the US Dollar, as measured by the DXY index, saw some gains following promising results in June’s Retail Sales figures reported during the European session.
That being said, the US economic outlook shows indications of disinflation, bolstering the markets' confidence in a rate cut in September. Federal Reserve officials, however, are maintaining a cautious stance, emphasizing their reliance on data before making any significant moves.
Daily digest market movers: DXY sees some light following encouraging Retail Sales, outlook still negative
- As the week began, the USD found itself under pressure due to the effect of the previous week's inflation statistics, which fueled confidence among traders for a likely rate cut in September.
- On the data front, retail sales remained flat at 0.0%, though the previously reported increase of 0.1% was revised upward to 0.3%.
- Retail Sales ex Autos rose by 0.4% after the 0.1% decline in May. That same -0.1% has been revised to 0.1%.
- The CME FedWatch Tool broadly supports the notion of a rate cut in September, with the odds currently standing over 85% for a 25-basis-point cut.
DXY Technical Outlook: Bearish attitude steady while bulls make a stride to recover the 200-day SMA
The outlook for the USD remains bearish despite the DXY index regaining the 200-day Simple Moving Average (SMA). Technical indicators such as the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) are both deep in negative terrain, suggesting it’s the seller's time now.
Despite losing more than 0.80% towards the end of last week, a slight upward correction may occur. Nonetheless, the bullish momentum gained on Tuesday is fragile, making the overall technical outlook decidedly bearish.
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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