US Dollar starts the week neutral, inflation data to set the week's pace

USD steady course remains unaffected by geopolitical tensions despite the lack of substantial fundamentals.
Fed officials maintain positive projections of the US labor markets amid looming concerns of slow job growth.
The market maintains the previous week's predictions; the first rate cut is anticipated in September with marginally lower odds.

The US Dollar (USD), measured by the US Dollar Index (DXY), indicated continuous horizontal movement above the 103.00 level during Monday's trading session. This follows relatively quiet market sentiment and unaltered US stock index futures, with the 10-year US yield sticking close to 4% in the earlier part of the day.

Though market expectations for upcoming monetary policy decisions remain the same, the US economic outlook continues to suggest growth above trend, insinuating a potential overestimation of the market for aggressive easing in the future.

Daily digest market movers: US Dollar stability persists ahead of inflation figures

Market trends from the previous week transition smoothly into the current week. JPY and CHF underperformed on Monday, although global bond yields and equity markets are slightly boosted.
Due to the lack of significant data releases on Monday, markets are upholding last week's trends while watching for important US data releases slated for this week, including PPI, CPI, and Retail Sales data.
The market is still fully pricing in 100 bps of easing by year-end, extending to 175-200 bps of total easing over the next 12 months.
However, this easing path seems unlikely unless the US economy sinks into a deep recession. More data is required to redirect this dovish narrative.

DXY technical outlook: Bearish bias persists amid continuous buyer efforts

DXY’s technical outlook remains bearish, with buyers struggling to evolve a significant move. The index retains its position beneath the 20, 100 and 200-day Simple Moving Averages (SMAs), conforming to a predominantly bearish bias. The momentum-based Relative Strength Index (RSI) continues its position below 50, suggesting consistent selling pressure. Additionally, the Moving Average Convergence Divergence (MACD) remains in negative terrain, showing lower red bars. Despite the week's gains, the overall technical outlook has not significantly improved, suggesting the continuous possibility for a correction.

Support Levels: 103.00, 102.50, 102.20.

Resistance Levels: 103.50, 104.00.

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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