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- US Dollar steady as traders await inflation data, Fed rate decision
US Dollar steady as traders await inflation data, Fed rate decision
- US Dollar stabilised after losing substantial ground against its peers at the end of last week.
- Traders are on edge with several important US economic data points and the Fed Interest Rate Decision on the agenda.
- US Dollar Index holds just above 103.25 and will be data dependent on its path forward for this week.
The US Dollar (USD) is in wait-and-see mode at the start of this week with traders gearing up for what will be an eventful week after the lacklustre performance last week. Biggest highlights to have in mind for this week are the US Consumer Price Index (CPI) numbers on Tuesday, Industrial Production on Thursday and the Michigan Consumer Sentiment survey on Friday. As if that is not enough, traders will have the opportunity to dissect the latest stance of the US Federal Reserve (Fed) with its June interest rate decision, including the press conference from Fed chairman Jerome Powell, on Wednesday.
For this Monday, the Dollar Index (DXY) is making a small recovery after its slide lower at the end of last week, dipping below 103.25. In the Asia-Pacific session, traders revalued the US Dollar back above 103.50 as Monday already holds an important event, the auction of 3-year and 10-year Treasury notes. The Federal Budget Balance for May will be printed as well on Monday.
Daily digest: US Dollar to be mostly data-driven this week
- Not much comments expected in the run-up to the Fed Interest Rate Decision on Wednesday as the Fed speakers are in their blackout period.
- Sentiment during the Asian session showed some mild appetite for risk, with Japan Topix Index up 0.60% near its closing bell. European indices are taking over the positive tone with the German DAX up 0.50% in early trading, at the time of writing.
- US equity futures had a positive close for the week on Friday and several indices have been breaking out of the bearish patterns, underlining the positive sentiment in the aftermath of the US debt ceiling agreement.
- The CME Group FedWatch Tool shows that markets are pricing in a 30% chance of rate hike for June and an 85% chance for a hike in July. The pause this week could trigger some further easing in the DXY.
- The benchmark 10-year US Treasury bond yield trades at 3.75%. A touch lower since the US Initial Jobless Claims showed an uptick, coming out at 261,000 against 233,000 previous. The numbers account for the second highest print for this year.
US Dollar Index technical analysis: USD bears have some room to move
The US Dollar Index (DXY) has been on a tear the past two weeks and nearly touched 105.00 to the upside at the end of May. Since then, the DXY has refrained from making new highs and is showing a bearish patterns with lower highs and lower lows. Support in the form of the 100-day SImple Moving Average (SMA), near 103.00, is expected to be tested soon for support
On the upside, 105.47 (200-day SMA) still acts as long-term price target to hit, as the next upside key level for the US Dollar Index is at 105.00 (psychological, static level), and acts as an intermediary element to cross the open space.
On the downside, 103.00 (100-day SMA) aligns as the first support level to confirm a change of trend. In the case that breaks down, watch how the DXY reacts at the 55-day SMA at 102.53 in order to assess any further downturn or upturn.
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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