US Dollar sees Monday’s gains under pressure

• The US Dollar is back to normal trading conditions after the US holiday on Monday.
• Traders will get a first batch of US housing data and the US Treasury is holding another auction. 
• The US Dollar Index trades above 102.50 but sees selling pressure after its subdued performance in Asia.

The US Dollar (USD) sees its gains from Monday against several Asian currencies coming under pressure a bit as markets digest the People’s Bank of China (PBOC) rate cut this Tuesday. Traders and investors  expected more from the PBoC, sending equities lower and pushing Crude Oil down to $71.

On the data front, this week will be mainly on US housing, ranging from permits to construction numbers and house prices. For today, Housing Starts and Building Permits numbers for May are expected to come in at 12:30 GMT . A few Federal Reserve (Fed) members are taking the stage as well. St. Louis Fed President Jim Bullard will talk  at the Barcelona School of Economics at 10:30 GMT, while Federal Reserve Bank of New York President John Williams and Fed’s vice chairman for supervision Michael Barr will speak on leadership at a NY Fed event. 

Daily digest: US Dollar faces a packed and eventful week

• Datapoints of interest for today: At 12:30 GMT a big batch of housing data is set to hit the markets with Housing Starts numbers for May expected to come in at 1,400K against 1,401K last month. Building Permits are expected at 1,423K from 1,417K. On a monthly basis, Building Permits are expected to decline 5% after decreasing 1.4% a month earlier, while Housing Starts are seen dropping 0.8% after a 2.2% increase in April.  Outlier data point between all this housing data will be the Philadelphia Fed non-manufacturing index for June, which came in at  -16 the prior month.  
• Fed’s Bullard will give a speech at the Barcelona School of Economics at 10:30 GMT, and both Fed’s Williams and Barr will speak  on leadership at the NY Fed event at 15:45 GMT. 
• The US Treasury is heading back to the markets for funding as it auctions a 3-month bond and a 6-month bond, both around 15:30 GMT. 
• AUD/USD moved substantially in favor of the US Dollar by over 0.5% after the Royal Bank of Australia (RBA) mentioned in its latest central bank meeting minutes that the surprise interest-rate hike in June is finely balanced, pointing to a possible end of the hiking cycle in Australia. 
• China has cut both its 5-year and 1-year Loan Prime Rate from 4.3% to 4.2% and from 3.65% to 3.55%, respectively. The move was received with disappointment by markets.  
• Japanese Finance Minister Shunichi Suzuki  said that Japan wants foreign exchange rates to move in a stable manner. Suzuki said that they are watching FX on a daily basis and that appropriate action might be necessary. Last intervention dates from the fall of 2022, and any move in this direction could trigger a big-figure move intraday between the Japanese Yen and the US Dollar. 
• The disappointing tone on China impacts commodities, with WTI Crude Oil down nearly 1% to $71.22 and gold up $5 to $1,955. Iron Ore and all other precious metals are on the back foot in the assumption demand will not pick up anytime soon out of China. Even the Baltic Dry Index, a good measure on global trade, is down over 1% for the price per shipping container. All these elements should help global inflation and price pressures abate further. 
• Equities are also in the red,  with China tech stocks leading the losses and the overall Hang Seng Index down 1.60%, which in turn drags other major Asian indices to the downside. European markets are taking over the negative sentiment from Asia and are trading in the red.US equity futures are on the downside as well. 
• The CME Group FedWatch Tool shows that markets are pricing in a 74.4% chance of a 25 basis points (bps) hike on July 26th.   Markets seem to be pricing in just one more hike and done as all other futures for 2023 are pointing to an unchanged rate level. The market is challenging the view of the Fed’s Dot-Plot curve, which showed most Fed members see two more hikes this year. 
• The benchmark 10-year US Treasury bond yield trades at 3.80% and gapped open against the close on Friday as there was no bond trading on Monday due to the public holiday. US bonds are receiving some bids as investors rebalance their exposure against China after a disappointing step in their monetary easing. 

US Dollar Index technical analysis: Blurred picture gives a mixed result

The US Dollar is seeing some selling pressure as it is giving up some gains from Monday against most Asian pairs, while the US Dollar Index (DXY) has been able to jump above 102.50. The European session is picking up speed and sees European currencies like the Euro, Swedish Krona and Norwegian Krone all advancing against the Greenback. In Asia, the South Korean Won and the Japanese Yen are paring back some of their losses against the USD, making the DXY to slide below 102.50. 

On the upside, the 55-day Simple Moving Average (SMA) at 102.57 has turned from support into resistance. Should the DXY recover further today or this week, look for the 103.00 psychological level as the next big challenge to the upside. The 100-day SMA at 103.05 will be key to reach, should the DXY want to advance further.  

On the downside, the psychological level near 102.00 is the only element upholding DXY. Once price action starts to reside below it, expect to see another nosedive move toward 100.82. That means a challenge for the low of this year and would imply a substantial devaluation for the Greenback to come. 

How does Fed’s policy impact US Dollar?

The US Federal Reserve (Fed) has two mandates: maximum employment and price stability. The Fed uses interest rates as the primary tool to reach its goals but has to find the right balance. If the Fed is concerned about inflation, it tightens its policy by raising the interest rate to increase the cost of borrowing and encourage saving. In that scenario, the US Dollar (USD) is likely to gain value due to decreasing money supply. On the other hand, the Fed could decide to loosen its policy via rate cuts if it’s concerned about a rising unemployment rate due to a slowdown in economic activity. Lower interest rates are likely to lead to a growth in investment and allow companies to hire more people. In that case, the USD is expected to lose value.

The Fed also uses quantitative tightening (QT) or quantitative easing (QE) to adjust the size of its balance sheet and steer the economy in the desired direction. QE refers to the Fed buying assets, such as government bonds, in the open market to spur growth and QT is exactly the opposite. QE is widely seen as a USD-negative central bank policy action and vice versa.