US Dollar sustains losses as disinflation fears mount
- US Dollar is showing additional losses, DXY index finds support at the 104.00 area.
- Markets are increasingly confident about a September rate cut.
- Jerome Powell's upcoming speech may potentially influence the USD.
The US Dollar measured by the DXY maintains its bearish trajectory, hitting lows from April around 104.00. The downturn is largely attributed to signs of disinflation in the US economy, which is fostering confidence in the markets for a potential Federal Reserve (Fed) rate cut in September.
Despite boosting market certainty of a rate cut, Fed officials are adopting a cautious stance by emphasizing that their decision remains highly reliant on data.
Daily digest market movers: USD under pressure due to weak inflation numbers, eyes on Powell
- Concerning the data releases, last week's low inflation numbers have put the USD under significant pressure, amplifying the possibility of a September rate cut.
- Federal Reserve Chairman Jerome Powell is scheduled to speak at the Economic Club of Washington DC later in the sessions, with markets keenly awaiting any hints regarding future monetary policy actions.
- This week will also see significant commentary from other US policymakers in the run-up to the monetary policy meeting on July 31.
- The CME FedWatch Tool continues to show a high probability of a rate cut in September, currently standing at around 86% for a 25 bps cut.
- The US 10-year benchmark rate is currently at its lowest since April, at 4.20%.
DXY Technical Outlook: Bearish sentiment continues as DXY remains below the 200-day SMA
The outlook is negative for the USD with daily indicators, including the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD), deeply below the 50 mark, nearing the oversold threshold. In addition, the DXY index is trading at its lowest level since April, having lost the 200-day Simple Moving Average (SMA) support.
While it has lost more than 0.80% since the end of last week, a mild upward correction may be possible with the mentioned SMA at 104.40 as the main resistance to target.
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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