US Dollar gains traction as markets assess latest US data

US Dollar stays resilient against its rivals after Monday's meagre recovery attempt.
US Dollar Index continues to fluctuate slightly below 100.00.
US Retail Sales rose modestly in June while Industrial Production contracted.

The US Dollar managed to find demand in the early trading hours of the American session on Tuesday. The US Dollar Index (DXY), which declined to a daily low below 99.60, recovered toward 100.00 and erased its losses.

Retail Sales in the US rose 0.2% in June to $689.5 billion, the US Census Bureau reported on Tuesday. The 0.3% increase recorded in May got also revised higher to 0.5%. Retail Sales Ex-Autos increased 0.2% in the same period, coming in slightly below the market expectation of 0.3%.

Daily digest market movers: US Dollar finds a foothold Tuesday

Industrial Production in the US contracted 0.5% for the second straight month in June, the US Federal Reserve's monthly publication revealed on Tuesday.
The Dow Jones Industrial Average is up more than 0.5% after the opening bell on Tuesday, while the S&P 500 gains 0.15%.
The benchmark 10-year US Treasury bond yield stays deep in the red at around 3.75% following Monday's choppy action.
Wall Street's main indexes closed in positive territory on Monday. Boosted by the upbeat performance of tech shares, the Nasdaq Composite Index gained nearly 1%.
China's real Gross Domestic Product (GDP) expanded 6.3% in the second quarter on year, according to data released by China's National Bureau of Statistics (NBS) early Monday. This reading followed the 4.5% growth recorded in the first quarter but came in below the market expectation of 7.3%. Citigroup lowered the full-year growth forecast for China to 5% from 5.5%.
US Treasury Secretary Janet Yellen told Bloomberg on Monday that there is a good chance that the Biden administration will go ahead with outbound investment controls on China.
The US Dollar weakened significantly last week as soft inflation data from the US revived expectations about the Federal Reserve reaching the terminal rate with a 25-basis-point (bps) rate hike in July.
The Consumer Price Index (CPI) in the US rose 3% on a yearly basis in June, following the 4% increase recorded in May. The annual Producer Price Index (PPI) edged 0.1% higher in the same period.
Commenting on the USD's outlook, "In case of an increasingly rapid fall in inflation and weakening economic data, the market might increasingly rely on key rates not remaining at high levels for a long time, whereas rate cuts before the end of the year are becoming increasingly likely," said Antje Praefcke, FX Analyst at Commerzbank. "That would cause the USD to ease further."
The University of Michigan reported on Friday that the Consumer Sentiment Index improved to 72.6 in July's flash estimate from 64.4 in June.
The Federal Reserve Bank of New York's Empire State Manufacturing Survey for July, released on Monday, showed that the General Business Conditions Index declined to 1.1 from 6.6 in June.
Markets are nearly fully pricing in a 25 bps Fed rate increase in July. The probability of one more rate hike in December stands at around 20%, according to the CME Group FedWatch Tool.

Technical analysis: US Dollar Index is yet to gather recovery momentum

Following Monday's choppy action, the US Dollar Index (DXY) remains technically oversold on Tuesday, with the Relative Strength Index (RSI) indicator on the daily chart staying well below 30.

The DXY needs to rise above 100.00 (psychological level) and confirm that level as support to attract buyers and stage an extended correction. In that scenario, 101.00 (former support, static level) could be seen as the next recovery target.

On the downside, 99.20 (static level from March 2022) aligns as next support before 99.00 (psychological level) and 98.30 (200-week Simple Moving Average).

US Dollar FAQs

What is the US Dollar?

The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022.
Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.

How do the decisions of the Federal Reserve impact the US Dollar?

The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.

What is Quantitative Easing and how does it influence the US Dollar?

In extreme situations, the Federal Reserve can also print more Dollars and enact 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 when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.

What is Quantitative Tightening and how does it influence the US Dollar?

Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.

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