US Dollar up ahead of eventful week
|- US Dollar DXY kicks off the week with a slump after a brief rebound at the end of last week but managed to clear daily losses.
- The anticipated exit of President Joe Biden from the presidential race invigorates investors' risk appetite which might limit the upside.
- Dovish Fed expectations might also present a challenge to the green currency.
As the week opened, the US Dollar, measured by the DXY index, exhibited a decline towards the 104.30 area and then recovered to 104.40. US President Joe Biden's expected departure from the presidential race has favored former President Donald Trump, and this upheaval has spurred investors to lean towards riskier assets. Complementing this, the expectation of a dovish stance from the Federal Reserve has resulted in an abrupt round of US Dollar selling. Further indicators to look out for during the week are the Gross Domestic Product (GDP) Q2 revisions and Personal Consumption Expenditures (PCE), which are widely anticipated to add an element of volatility in the USD.
Although the US economy is indeed showing early signs of disinflation, market confidence in a favorable September rate cut from the Federal Reserve remains steady. Even so, Fed officials express a strained demeanor and emphasize the importance of adhering to a data-dependant approach before rushing into any hasty interest rate reductions.
Daily digest market movers: DXY has a bumpy ride due to Fed policy outlook and impending US elections
- The outlook for the Fed's policy and the unsettled politics of the US election continue to be the two major catalysts driving the USD's trajectory.
- As former President Trump becomes the favorite, after Joe Biden’s extir, investors will focus on three broad areas: immigration, tariffs, and fiscal policies. So markets will keep an eye on Trump’s hints about its economic plans.
- The CME FedWatch Tool sheds light on the widespread anticipation about the September rate cut as investors are pricing in a 25 bps cut.
- The upcoming GDP and PCE data are likely to shape the USD dynamics for the week ahead as they will guide markets on the next Fed moves.
DXY Technical outlook: Bearish signs persist despite attempts to rise above 200-day SMA
The DXY index might have tallied minor gains last week, but the bearish outlook remains unchanged, primarily as the index faces a tough time ascending above the 200-day Simple Moving Average (SMA) at 104.30. The bearish stance is further supported by the daily indicators like the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD), which remain in negative area, suggesting a continuation of downside momentum.
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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