US Dollar stands soft after mixed PCE figures
|- US Dollar DXY struggling to rebound amid mixed PCE figures and anticipations of Fed cuts.
- The possibility of a rate decrease by the Fed in September remains, though somewhat toned down.
- All eyes are now on next week’s FOMC decision.
On Friday, the US Dollar, as depicted by the DXY, displayed some resilience despite encountering daily losses post the release of mixed Personal Consumption Expenditures (PCE) data. The market continues to wrestle with the prospect of a rate cut in September by the Federal Reserve (Fed), even though expectations have somewhat softened.
Signs of disinflation in the US economy have begun to surface, thereby boosting confidence in a potential rate cut come September. Yet, Federal Reserve officials remain cautious and data-dependant so next week’s meeting will be crucial for the short-term market’s dynamics.
Daily digest market movers: US Dollar on shaky ground with mixed PCE data
- The annual core PCE, excluding volatile food and energy items, revealed a steady growth of 2.6%, contradicting economists' prediction of deceleration at 2.5%.
- The monthly core PCE inflation, the Fed's favored inflation tool, rose beyond the former and expected data of 0.1% to reach 0.2%.
- Though this higher growth pace is considered consistent, it falls short of dampening expectations that the Federal Reserve will roll out reduced interest rates by the September meeting, projecting two cuts this year.
- Next week’s Federal Open Market Committee (FOMC) will provide markets with additional guidance on the bank’s stance.
DXY Technical outlook: Bearish tendencies persist despite the struggle to uphold
Even though the DXY Index is battling to hold onto the 200-day Simple Moving Average (SMA), bearish signs continue to persist. The direction of the index thus now largely depends on whether the DXY can maintain the mentioned SMA but whats likely is that the index might side-ways trade in the next sessions as indicators including the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) remain in negative zone but flattened.
Supports are noted at 104.15 and 104.00 levels, while resistances are observed at 104.30 and 104.50 levels.
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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