- The US Dollar turns flat ahead of US session after gaining in early trading.
- The bond market is signalling issues ahead with Trump’s spending plans.
- The US Dollar index falls back below 106.00 ahead of JOLTS numbers.
The US Dollar (USD) gained strength on Tuesday before falling flat, with the bond market fretting over former US President Donald Trump’s spending plans. The possibility of Trump being reelected as President gained a lot after the US Supreme Court ruling confirmed on Monday that Trump has partial immunity in the court cases on the riots that ended in a breach at the US Congress. With the recent spending plans revealed by the former President, the bond market is worried about where the money will come from while local market conditions could turn into higher inflation again.
On the US economic front, the calendar is relatively light in terms of data. However, from a speaker's point of view, the big guns are out. European Central Bank (ECB) President Christine Lagarde and the US Federal Reserve (Fed) Chairman Jerome Powell will take the stage at the Sintra ECB symposium.
Daily digest market movers: Sintra epicenter
- At 13:30 GMT, Fed Chairman Jerome Powell and ECB President Christine Lagarde will participate in a panel about monetary policy at the ECB Forum on Central Banking in Sintra, Portugal.
- The JOLTS Job Openings figure for May will be released at 14:00 GMT. A slide towards 7.9 million is expected from the previous count of 8.059 million.
- Equities are cracking a bit under pressure on the back of the reaction in the bond market after Trump’s legal victory. Both European and US equities are in the red ahead of the US session.
- The CME Fedwatch Tool is broadly backing a rate cut in September despite recent comments from Fed officials. The odds now stand at 59.9% for a 25-basis-point cut. A rate pause stands at a 34.7% chance, while a 50-basis-point rate cut has a slim 5.4% possibility.
- The US 10-year benchmark rate trades near 4.44% and prints a new high for the week.
US Dollar Index Technical Analysis: Chopping around
The US Dollar Index (DXY) is gaining on the back of some risk-off sentiment that entered the markets late Monday. The change of heart came after the US Supreme Court ruling that fell partially in favor of former US President Donald Trump. With the DXY now gaining more momentum, the threat grows by the day the Japanese government might intervene to safeguard the Japanese Yen (JPY).
On the upside, the pivotal level of 105.89 is being regained, which is a must have for additional gains. Once a daily close has taken place above that level, marching above the red descending trend line in the chart below at 106.26 and the peak of April at 106.52 are the two main resistances ahead of a fresh nine-month high. That would be reached once 107.35 is being broken to the upside.
On the downside, 105.53 is the first support ahead of a trifecta of Simple Moving Averages (SMA). Next down is the 55-day SMA at 105.25, safeguarding the 105.00 round figure. A touch lower, near 104.75 and 104.46, both the 100-day and the 200-day SMA form a double layer of protection to support any declines together with the green ascending trendline from last December.
US Dollar Index: Daily Chart
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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