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- US Dollar braces for Powell speech while Greenback jumps
US Dollar braces for Powell speech while Greenback jumps
- US Dollar price action in the green against nearly every major G10 currency.
- Traders will be hearing from both Lagarde and Powell this Friday.
- US Dollar Index strengthens sharply during European trading hours.
The US Dollar (USD) is already storming out of the gate ahead of the long awaited speech from US Federal Reserve (Fed) Chair Jerome Powell later this Friday from the Jackson Hole Symposium in Wyoming. Already ahead of the statement, the Greenback is advancing firmly against every major peer from G10 currencies as several Fed members in the past few days repeated the same message: steady for longer. Markets are pricing out any early cuts and now see a first cut by May 2024.
Although Michigan Consumer Sentiment and Consumer Inflation expectations are due to be published on the macroeconomic data front, expect the speech from Powell to be the only talk in town and the primary market moving event this Friday. Volatility will pick up already earlier on Friday as more central bank speakers are set to take the stage at Jackson Hole.
Daily digest: US Dollar nears end game
- As of 14:00 GMT, a lot of headlines are expected out of the Jackson Hole Symposium: Near 14:00 US Fed Chair Jerome Powell will give his keynote speech. Next at 15:00 GMT, the Fed’s Patrick Harker will speak alongside Loretta Mester. At 18:00 GMT, the Fed’s Austan Goolsbee will be taking the stage. Half an hour later, the Fed’s Loretta Mester is due to speak again at 18:30. To round out the week, Christine Lagarde from the European Central Bank (ECB) will speak at 21:00 GMT.
- At 14:00 GMT, the Michigan Consumer Sentiment will come out for August. The Index is expected to stay steady at 71.2. The inflation expectation is expected to remain unchanged as well at 2.9%.
- Germany’s Gross Domestic Product (GDP) stays flat at 0% and makes the Euro weaker on the back of that data.
- The People's Bank of China (PBoC) did it again and fixed the Yuan at 7.1883 while 7.2826 was expected. Meanwhile, Chinese government asks banks to limit some Connect Bond outflows and to ease mortgage rules for home buyers.
- ECB member Joachim Nagel said it is too early for a rate pause, though the ECB needs more data for its decision in September. After these comments, ECB member Boris Vujcic said that inflation has peaked and the economy in the eurozone is stagnating.
- Equities are a mixed bag on this Friday: Asian equities are down with the Japanese Topix closing -0.88% lower. Hong Kong’s Hang Seng index is down -1.29%. European equities are flat together with US Futures for now.
- The CME Group FedWatch Tool shows that markets are pricing in an 80.5% chance that the Federal Reserve will keep interest rates unchanged at its meeting in September. This is the lowest number in weeks as markets start to get afraid of possibly another rate hike.
- The benchmark 10-year US Treasury bond yield trades at 4.25% after touching a new yearly high on Monday at 4.3618%. The bond market will be very sensitive to any news on Friday at the Jackson Hole Symposium. The whole US yield curve could move up or down depending on the speech from Fed Chair Jerome Powell.
US Dollar Index technical analysis: "Up and adam"
The US Dollar is hitting the currency pairs hard with the Greenback advancing in nearly every single cross or pair. Already this Friday morning during European trading hours, the Greenback received a tailwind from the 0% German GDP, which made investors flee into the US Dollar and away from the Euro. This results in a US Dollar Index firmly above 104.
On the upside, as you could have guessed from the above paragraph, 104.00 is the first nearby target. The high of last week’s Friday at 103.68 remains vital and needs to get a daily close above it in order for the DXY to eke out more monthly gains. Should this US Dollar strength persist for the last part of this year, May’s peak at 104.70 could become the reality again.
On the downside, several floors are likely to prevent a steep decline in the DXY. The first one now is that level from last week Friday at 103.68, which now needs to hold for a daily close above. In case Powell completely flips the mood for the Greenback, look for the 200-day Simple Moving Average (SMA) at 103.16. Passing below the 103.00 figure, some room opens up for a further drop. However, around 102.38 both the 55-day and the 100-day SMAs await to backstop the pairs.
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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