US Dollar expected to have a quiet day with Juneteenth

• The US Dollar opens on a calm note on Monday as both the Asia-Pacific and European sessions are not producing any notable big moves from or against the Greenback. 
• Traders will hear from Fed speakers, including  Chairman Powell, as he will testify before the Senate later this week. 
• The US Dollar Index has moved only a few pips, trading above 102.00.

The US Dollar (USD) is bottoming out at the start of a new week, with no big movers to report from the Asia-Pacific or European sessions. The US has a public holiday on Monday, so no economic data or Fed speakers are on the docket. One element of importance that could move the market is that US Secretary of State Antony Blinken will meet with Chinese President Xi Jinping.

In terms of data, the focus this week will mainly be on housing as several figures such as housing starts, building  permits and existing home sales  will be reported. Data pointing to a sharp deterioration  in the housing sector could be perceived as a negative for the US Dollar and could see it becoming weaker on the back of these numbers. A lot of Fed speakers will be taking the stage as well this week, with the main event for US Fed Chairman Jerome Powell, who is set to deliver his semi-annual speech before US Congress on Wednesday. Closing the week there will be the preliminary prints from S&P Global Manufacturing and Services Purchasing Managers Index (PMI) for June. . 

Daily digest: US Dollar keeping its head above water 

• The European Central Bank (ECB) has told banks to brace for harsher stress tests and consequent results. 
• US Secretary of State Blinken has met Chinese Foreign Minister Wang Yi and President Xi. 
• In the wake of the Blinken-Wang Yi meeting, Wang Yi said the US must stop the downward spiral of ties between the two countries. China-US ties need to be back on a stable track, he said. 
• Nearly all stock markets in Asia and Europe are on the back foot as traders are disappointed by the less-impactful stimulus package from China. US equity futures are all mildly in the red. 
• 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.  Overall, the point of view here seems to be 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 3.76%, unchanged due to the official bank holiday in the US. 

US Dollar Index technical analysis: pivotal support not needed yet 

The US Dollar is licking its wounds after a very turbulent and downbeat performance last week. With the US holiday this Monday, the Greenback remains afloat and is marginally booking some profits left and right, triggering a small 0.10% gain in the US Dollar index (DXY). Should the DXY refrain from breaking below 102, a bounce higher could be in the cards later this week. 

On the upside, the 55-day Simple Moving Average (SMA) at 102.55 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 for now. Once price action should start to reside below it, expect to see another nosedive move for the US Dollar Index 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.