US Dollar sees a little bounce ahead of Fed
- Fed easing expectations continue to mount, and markets are pricing in high odds of 50 bps cut.
- Analysts expect 25 bps cut on Wednesday.
- US Retail Sales data has little impact on the USD.
The US Dollar remained stable at the start of the US trading session on Tuesday, showing little response to the release of Retail Sales data as anticipated. The US Dollar Index (DXY), which is a measure of the Greenback against a basket of six currencies, edged slightly higher, pulling away from its low for the year but with only a minimal recovery. Federal Reserve (Fed) easing has become more likely, with market pricing implying a 50 bps cut, while most analysts still predict a 25 bps cut.
The US economy is experiencing growth above historical norms, indicating that the market is pricing in overly optimistic expectations of monetary policy easing. This surge in optimism may be excessive as the economic data suggests that the Fed is likely to maintain its current stance of gradual interest rate increases.
Daily digest market movers: US Dollar rises mildly, investors still anticipate aggressive Fed easing
- Market expectations for aggressive Fed easing have increased ahead of Wednesday's FOMC decision.
- Most analysts anticipate a 25-basis-point cut, but a handful predict a larger 50-basis-point cut.
- The market is pricing in a 65% chance of a 50 bps cut and 250 bps of easing over the next 12 months.
- The market's aggressive rate path expectations are unlikely to be validated by the updated Dot Plot.
- Risks of a dovish surprise from the Fed remain, but not all members are expected to support such a move.
- On the data front, according to the US Census Bureau's report on Tuesday, Retail Sales in the US grew by 0.1% in August, reaching $710.8 billion.
- This followed a 1.1% rise in July and surpassed market predictions, which had anticipated a 0.2% decline. However, excluding automobile sales, Retail Sales increased by 0.1%, falling short of the expected 0.2% growth.
DXY technical outlook: DXY indicators signal bearish momentum but find support
DXY technical indicators moved lower into a bearish zone. The index fell beneath its 20-day Simple Moving Average (SMA), signaling a decrease in buying momentum. The Relative Strength Index (RSI) remains below 50, indicating a bearish trend but somewhat flattening. The Moving Average Convergence Divergence (MACD) indicator is displaying diminished green bars, suggesting weak buying pressure.
Support levels lie at 100.50, 100.30 and 100.00, while resistance is found at 101.00, 101.30 and 101.60.
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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