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- US Dollar advances further following Friday’s rally
US Dollar advances further following Friday’s rally
- USD extends its previous profits, continuing on a winning streak.
- US economy still shows strength, May's Consumer Price Index remains focal point.
- Fed's projections for the economy will be closely watched on Wednesday, but decision is expected to be a hold.
On Monday, the US Dollar Index (DXY) saw a hike, moving further up toward the 105.23 area, following the streak from Friday's rally. Despite some initial fluctuations, the broader perspective of the robust US economy remains strong, thus hinting at maintaining the USD gains.
Market participants are still keeping their focus mostly on the Consumer Price Index (CPI) for May and the Federal Reserve (Fed) meeting, both on Wednesday. As Monday's session didn't offer any major highlights, investors' eyes are glued to these upcoming events. The anticipated data along with the decision will provide a clearer image of the inflation rate and the potential changes in the monetary policy trajectory.
Daily digest market movers: DXY gains momentum, awaiting Wednesday's session
- Core CPI data prediction for May is currently at a slight slowdown to 3.5% YoY, while the overall inflation is expected to stand firm at 3.4%.
- Fed is presumed to retain interest rates at 5.5% in the June 15-16 meeting. Any deviation in this forecast could cause significant shifts in market activity.
- The Summary of Economic Projections and comments by Fed Chairman Jerome Powell should be key in understanding the economic future more comprehensively.
DXY technical analysis: Dollar Index recovers to positive ground post previous surge
The DXY Index has not only managed to stay afloat but has also recovered to a stronger position on the chart. The index stands above the 20, 100 and 200-day Simple Moving Averages (SMA), reinforcing the bullish outlook.
Additionally, the Relative Strength Index (RSI) manages to stay over 50, backing up the bullish sentiment further. The Moving Average Convergence Divergence (MACD) indicates the presence of increased demand at its current levels.
Fed FAQs
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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