- US Dollar, observed a fall reaching the lowest value since March.
- Federal Reserve bets continue to lean in favour of a dovish stance, consequently impacting the USD.
- Strong Housing data could not prevent this decline.
On Thursday, the US Dollar measured by the DXY index saw an extension in its decline, despite the strong housing data reported during the European session. Factors such as dovish bets on the Federal Reserve and lower US Treasury Yields are responsible for putting downward pressure on the USD.
The outlook for the US economy shows signs of disinflation, and markets are keeping confidence a potential cut in September. The Federal Reserve officials continue to show hesitation rushing to cuts and maintain a data-dependent approach and seem to put a cut in July on the table.
Daily digest market movers: DXY decline, housing data no help for the struggling USD
- Data concerning Housing Starts in June reported an improvement of 3%, amounting to 1.35 million units.
- According to the data unveiled by the US Census Bureau on Tuesday, this figure follows a decrease of 4.6% recorded in May.
- Building Permits showed a surge of 3.4% after a decline of 2.8% in the previous month.
- Thomas Barkin, the Richmond Federal Reserve President, suggested that the discussion at the July policy meeting will likely include whether it is still apt to describe inflation as elevated, as reported by Reuters.
- As per the CME FedWatch Tool, a rate cut in September seems to be priced in which pressured the USD down.
DXY Technical Outlook: DXY's bearish outlook remains, a minor correction to the upside possible.
Despite the decline, the DXY is grappling to regain the 104.00 area. Even though the daily indicators including Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) are far below the 50-mark, pointing towards a near-oversold condition, the DXY could see a slight correction.
Strong supports lie at the 103.50 and 103.00 levels. However, the overall technical outlook remains bearish.
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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