US Dollar declines as markets anticipate Fed Minutes and CPI
- DXY snapped a five-day winning streak and seems to be taking a breather below 103.00
- Fed easing expectations have been tempered following last week’s jobs report
- Fed speakers are expected to reiterate a gradual approach
The US Dollar Index (DXY), which measures the value of the USD against a basket of currencies, witnessed a calm Monday session with mild losses, holding steady despite elevated levels near last week's highs. Amidst ongoing Middle East tensions, market participants await key events this week, including the release of the Federal Reserve's (Fed) Federal Open Market Committee (FOMC) Meeting Minutes and US Consumer Price Index (CPI) data.
While the US economy exhibits moderate deceleration, indications of economic resilience persist. Despite this, the Fed maintains a data-driven approach, emphasizing the significance of incoming economic indicators in determining the pace of interest rate adjustments. In that sense, last week’s jobs report made markets price out a 50 bps cut in November or December.
Daily digest market movers: Falling US Dollar as markets await CPI data
- The probability of a 50 bps cut in November or December is now zero, according to swap markets, and a 25 bps cut next month is only 90% priced in
- Despite strong economic data, the market still anticipates 125 bps of total easing in the next 12 months
- Multiple Fed speakers this week are anticipated to emphasize data-dependency
- This week, headline and core CPI are expected to show a mild deceleration in September, and its outcome might put a stop to the USD’s upwards movement
DXY technical outlook: DXY momentum rests, resistance at 103.00
Indicators are resting after last week's gains, with the index ending a five-day uptrend. The Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) are firmly in positive territory with room for further upside.
Supports: 102.30, 102.00, 101.80
Resistances: 103.00, 103.50, 104.00
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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