US Dollar stands soft as markets react to Powell's words and Retail Sales data

The USD retreated on Friday after hitting yearly highs near 106.60.
The market has responded to Fed Chair Powell's comments with odds of a December cut falling to 60%.
Retail Sales expanded by 0.4% in October vs. the previous month, surpassing expectations.

The US Dollar Index (DXY), which measures the value of the USD against a basket of six currencies, failed to secure a sixth consecutive day of gains in a volatile trading Friday. Federal Reserve (Fed) Chair Jerome Powell has instilled uncertainty in the markets by expressing reservations about a December interest rate cut, while markets assess fresh Retail Sales data.

The US Dollar Index retreated slightly after reaching its highest point of the year. However, DXY remains in an uptrend, bolstered by cautious Fed rhetoric and strong economic data, which gives the Greenback an advantage over its peers.

Daily digest market movers: US Dollar declines as markets assess Powell’s words and Retail Sales

Fed Chair Powell downplayed the need for aggressive easing, citing economic strength.
Fed officials, including Kugler, reiterated the need for caution in rate cuts.
Market odds of a December cut have declined to 60% in fed funds futures and 45% in swaps markets.
Swaps market anticipates a terminal rate above the Fed's long-term rate of 2.875%.
US Retail Sales expanded by 0.4% in October, exceeding expectations and surpassing September's growth.
Retail Sales Control Group contracted by 0.1%, while excluding Autos sales grew 0.1% MoM, below consensus.

DXY technical outlook: Bulls retreat as investors book profits

The DXY's rapid surge to yearly highs above 107.00 was met with swift profit-taking, indicating a potential shift in market sentiment. The retreat suggests that buyers may have been overextended and a pullback could be in order.

Indicators including the Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD) continue showing overbought conditions, so it is likely that the consolidation will continue.

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

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.

How often does the Fed hold monetary policy meetings?

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.

What is Quantitative Easing (QE) and how does it impact USD?

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.

What is Quantitative Tightening (QT) and how does it impact 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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