US Dollar gains ground as eventful week begins
- US Dollar displays strength ahead of Wednesday Fed decision and labor market data
- Fed is expected to remain data-dependant but leave door open for September cut
- Markets are extremely confident about a September cut of 25 bps
The US Dollar represented by the DXY index charged forward on Monday despite looming uncertainties. The market remains on edge with September's potential rate cut by the Federal Reserve (Fed) somewhat uncertain, but optimism surrounding the US economy's strength is tempering anxieties. The Fed decision on Wednesday and labor market data will guide markets this week.
There is growing evidence of disinflation in the current US economic landscape, which solidifies the market's belief in a prospective rate cut in September. However, the broader economy demonstrates strength, as is made evident by recent data surprises like the Q2 Gross Domestic Product (GDP) and July S&P Global PMIs, which might give the Fed reasons not to rush a rate cut.
Daily digest market movers: US Dollar firms ahead of July labor data and FOMC meeting
- Two-day FOMC meeting concludes on Wednesday with a plausible commitment to unchanged rates
- Market players recognize the solid performance of the US economy warrants no immediate action by the Fed, but September FOMC meeting is predicted to bring a potential rate cut into the spotlight
- Chair Powell's press conference has the potential to sway markets, but his precedent of focusing on labor market uncertainty is likely to continue
- In that sense, labor market data to be released throughout the week will guide market bets regarding the September decision
DXY technical outlook: Bearish signs stall as index inches toward 20-day SMA
Pushing past initial signs of struggle, DXY Index is now rebounding from 200-day Simple Moving Average (SMA). The 20-day SMA is now viewed as the next target. However, key indicators such as the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD), though still in the red, are inching toward positive terrain.
Continued support is noted at 104.30 and 104.15 levels, while resistances are observed at 104.60 and 104.80 levels.
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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