US Dollar extends gains ahead of PCE
|- US Dollar DXY experiences a restricted gain as falling US Treasury yields may pose challenges during the session.
- US political changes continue to influence, and core PCE to be on focus next week.
- Fed officials maintain their data-dependent stance, keeping markets on their toes.
On Tuesday, the US Dollar measured by the DXY, witnessed a slight rise, albeit falling US Treasury yields are expected to pose a significant challenge for the rest of the session. This comes amidst expected shifts in financial markets due to new hints about economic plans from former President Donald Trump after Joe Biden's exit. The focus is still on high-tier data due this week.
Given signs of disinflation in the US, markets express optimism over potential rate adjustments in September. Even with these shifts on the horizon, Federal Reserve officials have reiterated their cautious approach toward deciding on rate changes, hence keeping the markets on their toes. Major indicators to watch out for over the week include Personal Consumption Expenditures (PCE) and Gross Domestic Product (GDP) Q2 revisions.
Daily digest market movers: US Dollar mildly up as focus shifts to PCE
- Mid-tier housing data came in lower than expected with Existing Home Sales posting a higher-than-expected monthly drop in June but didn’t trigger major movements on the USD.
- Weak Richmond Fed manufacturing index didn’t stop the USD bulls from advancing.
- On Friday, forecasts placed the core PCE at a 0.16% MoM increase and the spending is projected at a 0.3% MoM increase.
- The CME FedWatch Tool indicates a highly probable rate cut in September, although GDP and PCE data are set to determine the week's dynamics for the USD.
- US Treasury yields are down with the 2,5 and 10-year rates at 4.51%, 4.16% and 4.23%.
DXY Technical outlook: A slight bullish spree, yet bearish signs linger
Despite the current uplift above the 200-day Simple Moving Average (SMA), the DXY index still carries a neutral to bearish outlook. Bearish signals resurface as the DXY index's indicators are still largely in the negative zone, while a looming bearish crossover between the 20 and 100-day SMAs is evident around the 104.80 area. This, if completed, could give substantial momentum to the sellers.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named 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 during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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