- Fed easing expectations continue to evolve, two cuts by year-end are nearly priced in.
- September Retail Sales surprised to the upside, weekly jobless claims fell.
- ECB’s Lagarde has concerns about the EU economic outlook, which is benefiting the USD.
The US Dollar Index (DXY), which measures the value of the USD against a basket of six currencies, has continued its upward trajectory, marking its fifth consecutive day of gains. At press time, the DXY trades near 104.00.
This surge comes after the European Central Bank (ECB) President, Christine Lagarde, expressed concerns over the Eurozone economic outlook, prompting fears that the region could face further economic weakness. In addition, positive data from the US, including Retail Sales and weekly Initial Jobless Claims, benefited the USD.
The US economy has lately shown signs of economic resilience, while the markets continue to price in high odds of two cuts before the end of the year.
Daily digest market movers: US Dollar rises after positive data, easing bets increase
- Fed easing expectations have increased with markets now pricing in two cuts by year-end and 150 bps of total easing over the next 12 months.
- Robust economic data, including strong US Retail Sales and a healthy labor market, continue to support a resilient economic outlook.
- US Retail Sales surprised to the upside in September, increasing 0.4% to reach $714.4B and exceeding market expectations. In August, US Retail Sales arrived at a weaker 0.1%.
- US citizens filing new applications for unemployment insurance hit 241K for the week ending October 11. This was below consensus of 260K and the previous week's tally, which was revised upward to 260K.
DXY technical outlook: DXY maintains bullish momentum
The DXY index maintains bullish momentum with indicators continuing to gather strength. The index has crossed above the crucial 100-day Simple Moving Average (SMA) and is targeting the 200-day SMA at 103.80. If this level is breached, it would further enhance the bullish outlook. However, overbought signals from indicators suggest a potential correction
Support lies at 103.00, 102.50 and 101.30, while resistances are at 103.30, 103.50 and 104.00. Overall, buyers remain in control, but caution is advised due to overbought conditions.
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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