US Dollar picks up as Middle East tension offset Fed easing hopes

The USD appreciates on Monday as geopolitical concerns dampen risk appetite.
This week, a dovish turn by the Federal Reserve might halt US Dollar’s recovery.
DXY has scope for further recovery past 104.55, aiming for 105.15.

The US Dollar (USD) has opened the week on a somewhat firmer pace. Market concerns about the escalating tensions in the Middle East have shadowed investors' hopes of a Fed dovish turn later this week.

Israel has launched drone strikes in Lebanon after a deadly rocket attack in the Golan Heights this weekend, boosting concerns about a full-blown regional war that would involve the regional power, Iran.

Geopolitical concerns are overshadowing the fundamental docket, especially Wednesday’s Federal Reserve’s (Fed) monetary policy meeting. The Fed is likely to keep rates unchanged but investors are expecting a dovish turn in the bank’s rhetoric, acknowledging the cooling inflation trends and hinting towards a rate cut in September.

Before that, the JOLTS Job Openings for June and the Conference Board’s Consumer Sentiment Index for July, due on Tuesday, are expected to show moderate contractions, which will provide the right framework for a dovish message from the central bank.

Daily digest market movers: US Dollar favoured by the cautious market sentiment

In the absence of key fundamental releases on Monday, market concerns of an escalation in the Middle East are likely to weigh risk appetite and provide support for the US Dollar due to its safe-haven status.
On Tuesday, the US Conference Board’s Consumer Sentiment Index is expected to show a moderate decline to 99.5 from 100.4 in the previous month.
US JOLTS Job Openings are seen to have eased to 8.03 million in June from 8.14 million in May.
Future markets are pricing only a 4.1% chance of an interest rate cut by the Fed on Wednesday, with a 25 bps rate cut fully priced for September, according to the CME Group Fed Watch Tool.
Data seen last week showed that the US Personal Consumption Expenditures (PCE) Prices Index remained sticky in June, yet with the core PCE index at 2.6% year-over-year, which kept hopes of a September rate cut alive.
Earlier in the week, the US Gross Domestic Product (GDP) surprised with a 2.8% yearly growth in the second quarter, from 1.4% in the first, but still far from the growth levels seen in the second half of 2023.

DXY Technical Outlook: There is scope to extend its recovery beyond 1.0455

The bearish trend sewn in the first half of the month is losing momentum. The 4-hour chart shows RSI returning above the 50 line, with price action testing resistance at 104.55.

Fundamentals are supportive, and the strong rebound from the 104.05 support area on Monday suggests that there is scope for a further recovery.

Beyond 104.55, the next target would be 105.10, ahead of 105.80. Supports are the mentioned 104.05 and 103.60.

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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