US Dollar picks up recovery after volatile start to the US session on Wednesday

The US Dollar jigswas back into green numbers.
Markets are licking their wounds, with most equity indices in the red across the globe.
The US Dollar Index falls back to the mid-104.50 level.

The US Dollar (USD) is giving traders a run for their money, popping back up to a fresh session's high for this Wednesday in a rally that got fueled with comments from the Federal Reserve (Fed) Bank of Minneapolis President Neel Kashkari, who spooked markets on Tuesday. Kashkari suggested that a rate hike could still be a possibility this year. Markets ignored that Kashkari is a non-voter this year and can thus speak a little bit more freely and personally, together with his closing remark that he does not see a hike as a possible outcome for now.

On the economic data front, Wednesday’s focus is on the Richmond Fed Manufacturing index for May. Markets have already seen the Dallas Fed Manufacturing number sink further to -19.4 in May from -14.5. Another lower-than-expected Manufacturing Index could mean more easing ahead for the Greenback, with markets rejecting completely the rate hike possibility from Kashkari.

Daily digest market movers: markest are now really data driven

At 11:00 GMT, the Mortgage Applications got released by the Mortgage Bankers Association for the week of May 24. The previous week’s data was a positive 1.9% with a firm contraction this week by 5.7%.
The Redbook Index for the week of May 24 has jumped from 5.5% last week to 6.3% for this week.
At 14:00 GMT, the Richmond Fed Manufacturing Index for May will be released. The previous reading was -7, with a smaller improvement to -2 expected. As mentioned above, the importance of this number has been lined out with the chunky contraction seen on Tuesday in the Dallas Fed Manufacturing data.
The US Treasury is set to auction a 7-year Note around 17:00 GMT.
Federal Reserve Bank of New York President John Williams participates in a roundtable with local leaders about community services at an event organized by the Development Authority of the North Country in Watertown. Comments are expected around 17:45 GMT.
The Fed’s Beige Book is to be released at 18:00 GMT.
At 23:00 GMT, Federal Reserve Bank of Atlanta President Raphael Bostic participates in a moderated conversation about leadership and the US economic outlook at the Thirteenth Annual AEA Conference on Teaching and Research in Economic Education.
Equity markets are sliding lower with overall near 1% declines in both US and European equities.
According to the CME Fedwatch Tool, Fed Fund futures pricing data suggests a 53.7% chance for keeping rates unchanged in September, against 41.7% chance for a 25 basis points (bps) rate cut and 4.1% chance for an even 50 bps rate cut. A marginal 0.5% price in an interest rate hike, and it has not really increased in odds despite Fed’s Kashkari comments.
The benchmark 10-year US Treasury Note trades around 4.56% and peaks for this week.

US Dollar Index Technical Analysis: Dispersed

The US Dollar Index (DXY) played with fire on Tuesday after testing the lower and last support level in the current range. The 100-day Simple Moving Average (SMA) did its part around 104.34, and sent the DXY in a turnaround back up above 104.50. The question will be how long it will last, with the focus shifting to the Q1 US Gross Domestic Product (GDP) second estimate numbers on Thursday and the Personal Consumption Expenditures (PCE) Price Index for April on Friday.

On the upside, the DXY index needs to reclaim key levels it lost last week: the 55-day Simple Moving Average (SMA), currently at 104.82, and the 105.00 big round level. Further up, the following levels to consider are 105.12 and 105.52.

On the downside, the 200-day SMA at 104.42 and the 100-day SMA around 104.34 are the last line of defence. Once that level snaps, an air pocket is placed between 104.30 and 103.00. Should the US Dollar decline persist, the low of March at 102.35 and the low from December at 100.62 are levels to consider.

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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