US Dollar eases a touch with US markets closed and Europe's political turmoil fading

The US Dollar trades sideways with US markets in a brief moment of pause.
Markets face a relatively quiet trading day, with US markets closed in observance of Juneteenth.
The US Dollar index flirts with 105.00 support, though this week's upcoming US data might trigger a break.

The US Dollar (USD) trades very muted on Wednesday, with US markets closed in observance of Juneteenth. US bond markets are closed and US equities will only see the futures markets moving. Traders will be able to let the dust settle after the downbeat Retail Sales report for May, released on Tuesday.

On the US economic data front, there are two data points to digest on a very light trading day. The Mortgage Bankers Association will release its Mortgage Applications number for the week of June 14. The number has some importance because it was in contraction for a few weeks in a row until the previous week was a staggering 15.6% uptick.

Daily digest market movers: Time to assess

Although US markets are closed on Wednesday, there are some key headlines to report:
- Japan's opposition front asked Japanese Prime Minister Fumio Kishida to call for snap elections, Bloomberg reported.
- The US has given the green light for an arms deal with Taiwan, triggering fury with China on the matter, Baha news reported.
- France, Italy, Belgium, and five other European countries are set to be reprimanded and fined for their deficits breaching EU finance rules, according to Bloomberg.
At 11:00 GMT, the Mortgage Bankers Association released its Mortgage Applications survey. Last week’s number snapped the contraction path with a staggering 15.6%, where this week only saw a mild pickup in demand by 0.9%..
At 14:00 GMT, the National Association of Home Builders will release its June Housing Market Index. The previous number was 45, and a steady 45 is expected again.
Equity markets are not doing well again, with all indices in Europe in the red. US futures are marginally in the green.
The CME FedWatch Tool shows a 32.8% chance of the Fed interest rate remaining at the current level in September. Odds for a 25-basis-points rate cut stand at 60.0%, while a very slim 7.2% chance is priced in for a 50-basis-points rate cut.
The benchmark 10-year US Treasury Note trades at its lowest level in a month, at 4.22%. No further moves expected today as bond markets are closed.

US Dollar Index Technical Analysis: Rate cut bets are growing

The US Dollar Index (DXY) is trying to hold firm, though it is starting to lose its shine. With the European political turmoil starting to ease and fading into the background, US data comes to the forefront again. With downbeat US Retail Sales data for May released on Tuesday, the always resilient Dollar bulls must also start to doubt their beliefs. Under these current economic conditions, the Greenback is still a touch overvalued and needs another correction to head back to its fair value.

On the upside, there are no big changes to the levels traders need to watch out for. The first is 105.52, a barrier that held during most of April. The next level to watch is 105.88, which triggered a rejection at the start of May and will likely play its role as resistance again. Further up, the biggest challenge remains at 106.51, the year-to-date high from April 16.

On the downside, the trifecta of Simple Moving Averages (SMA) is still playing as support. First is the 55-day SMA at 105.12, safeguarding the 105.00 figure. A touch lower, near 104.59 and 104.47, both the 100-day and the 200-day SMA are forming a double layer of protection to support any declines. Should this area be broken, look for 104.00 to salvage the situation.

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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