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.
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.
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.
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