- US Dollar DXY experiences extended gains, approaching 104.30 as sellers step back.
- Concerns over the US labor market continue to burden the USD potentially.
- Risk aversion benefited the US at the end of the week.
On Friday, the US Dollar measured by the DXY index continued its rebound beyond the 104.00 mark, reaching 104.30, despite persistent worries about the labor market. This rise can be attributed to the sellers easing off and markets refuging itself in safe havens. Market anticipations of a rate cut in September by the Federal Reserve and the fragility of the US labor market are primary factors investors are focused on as their impact could put additional pressure on the currency.
The US economic outlook shows signs of disinflation, with financial markets remaining confident in a September rate cut. Despite this, Federal Reserve officials continue to exhibit hesitancy to hastily make interest rate cuts, sticking to a data-dependent approach.
Daily digest market movers: DXY recovers, Federal Reserve policy outlook and upcoming US elections the movers
- The two key catalysts currently contributing to USD movements are the outlook for Fed policy and the US elections, each having different implications for the USD.
- This month, the USD has attached more attention to Fed policy predictions.
- In recent weeks, anticipations of a September Fed rate cut have made the USD relinquish its position as the top-performing G10 currency this year, mainly due to the report of weak inflation and labor market data.
- The CME FedWatch Tool seems to strongly support a rate cut in September, suggesting that a nearly full rate cut is firmly expected.
DXY Technical outlook: Bearish outlook persists despite gains, must regain the 200-day SMA
The DXY successfully continued its rebound to around 104.30, but the outlook is still bearish with the index continuing to stand below its 200-day Simple Moving Average (SMA). However, daily technical indicators, like the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD), have gained some steam despite still in negative terrain, signifying that bearish pressures are yet to disperse.
The solid support levels continue to lie at 103.50 and 103.00, however, the general technical outlook still favors the bears. Buyers on the other hand should focus on regaining the 200-day SMA at 104.30.
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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