US Dollar off intraday high after monthly US New Home Sales sink over 11%

The US Dollar trades firmly in the green against nearly all major peers.
A light data calendar is ahead as markets digest hawkish Fed comments.
The US Dollar index breaks through 106.00 and heads higher

The US Dollar (USD) is outmatching other currencies on Wednesday for the second day in a row with some help from US Federal Reserve (Fed) officials, who seem to have turned more hawkish. Federal Reserve Governor Michelle Bowman lit the fire on the fuzz by saying that a rate hike is still an option while she sees too many potential risks that could still drive inflation higher. Her thesis became reality just a few hours later, after neighbouring country Canada released red-hot inflation numbers.

On the economic front, a rather light calendar ahead of Thursday’s Gross Domestic Product (GDP) final estimate and Friday’s Personal Consumption Expenditures (PCE) Price Index release. Still, traders will need to watch out for the Bank Stress Test report, to be published at 20:30 GMT, in which the Fed analyzes how healthy US banks’ balance sheets are in case of financial market distress.

Daily digest market movers: Housing data easing further

The Japanese Yen is cracking under pressure from the Greenback, with USD/JPY poping above the magic 160.00 level and printing a multi-decade high.
Markets got spooked by comments from Federal Reserve Governor Michelle Bowman on Tuesday, saying she is "willing to raise the target rate at a future meeting if inflation progress stalls or reverses", while she "expects US inflation to remain elevated for some time, still seeing a number of upside inflation risks."
At 11:00 GMT, the weekly Mortgage Applications Index from the Mortgage Bankers Association (MBA) came in and went from 0.9% to 0.8%.
New Home Sales data for May saw a decline of nearly 11.3%, from 698,000 units to only 619,000, missing the 640,000 units consensus view.
The US Treasury is heading to markets to allot a 5-year Note in the markets at 17:00 GMT.
The Fed’s Bank Stress Test report will come out near 20:30 GMT.
Equities are not licking this US Dollar strength, and are dipping lower in both Europea and the US.
The CME Fedwatch Tool is broadly backing a rate cut in September despite the recent comments from Fed officials, with odds now standing at 59.5% for a 25 basis point cut. A rate pause stands at a 34.1% chance, while a 50-basis-point rate cut has a slim 6.4% possibility.
The US 10-year benchmark rate trades at 4.28%, and trades ath the high for this week.

US Dollar Index Technical Analysis: Stronger due to outside reasons

The US Dollar Index (DXY) is rolling for a second day in a row, and is breaking out of its sideways pattern. The DXY is now trading just below the high of May and could rally further, should upcoming US data outperform again. Clearly the recent hawkish messages from Fed officials are spooking markets in the fear of having missed out on any signals that would signal an uptick in inflation is again at hand.

On the upside, the first level to watch is 105.88, which triggered a rejection at the start of May and on Friday last week. Further up, the biggest challenge remains at 106.52, the year-to-date high from April 16. A rally to 107.20, a level not seen since April 2023, would need to be driven by a surprise uptick in US inflation or a sudden hawkish shift from the Fed.

On the downside, 105.52 is the first support ahead of a trifecta of Simple Moving Averages (SMA). First is the 55-day SMA at 105.23, safeguarding the 105.00 round figure. A touch lower, near 104.66 and 104.48, both the 100-day and the 200-day SMA form 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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