The US Dollar lost some strength after on Thursday but managed to stabilize early Friday. The USD Index – which tracks the USD's valuation against a basket of six major currencies – touched its highest level in nearly a month above 102.80 in the European session on Thursday before retreating to the 102.50 area.
The US jobs report for July will be watched closely by market participants ahead of the weekend. Nonfarm Payrolls are forecast to rise by 200,000. The Unemployment Rate is seen holding steady at 3.6% and annual wage inflation is expected to retreat to 4.2% from 4.4% in June. The USD's valuation could be driven the labor market report in the American session due to its potential impact on the Federal Reserve's policy outlook.
The US Dollar Index (DXY) registered a daily close near 102.50 on Thursday, where the 50-day and the 100-day Simple Moving Averages are located. As long as this level stays intact as support, 103.00 (psychological level, static level) aligns as the next immediate resistance ahead of 103.70 (200-day SMA) and 104.30 (static level from May) could be set as next bullish targets.
Looking south, sellers could show interest if DXY returns below 102.50. In that scenario, 102.00 (psychological level, static level), 101.30 (20-day SMA) and 101.00 (psychological level, static level) could be seen as support levels.
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.
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.
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.
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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