- US Dollar recovers following last Friday’s gains.
- Inflation data takes center stage, CPI expected to show moderation.
- Fed easing expectations have steadied with market pricing in less aggressive cuts.
The US Dollar Index (DXY), a measure of the US Dollar against a basket of six currencies, extended its recovery on Monday ahead of key inflation data releases this week. Following the mixed labor market figures reported last Friday, the focus shifts to upcoming inflation data, with Consumer Price Index (CPI) figures expected to show moderation. Technical analysis indicates the potential for further US Dollar gains in the near term.
Despite positive growth indicators, the US economy faces potential risks. While the economy remains strong, the market may be overly optimistic in pricing future interest rate cuts.
Daily digest market movers: US Dollar continues recovering while market digests mixed NFPs
- US Dollar continues to make gains after last Friday’s dovish Fed comments and weaker-than-expected jobs data initially saw a sell-off.
- Greenback has staged a strong recovery and posted bullish engulfing patterns against every major currency except JPY and CHF.
- August CPI data will be reported on Wednesday with headline inflation expected at 2.6% YoY vs. 2.9% in July. Core inflation is expected to remain steady at 3.2% YoY.
- PPI data will be reported on Thursday with headline inflation expected at 1.7% YoY vs. 2.2% in July.
- Fed easing expectations have steadied with odds of a 50 bps cut this month falling to 20-25%. The market is still pricing in 100-125 bps of Fed easing by year-end.
- No Fed speakers are scheduled until Chair Powell’s press conference on September 18.
DXY technical outlook: DXY seeks 101.60 resistance
Indicators show some momentum but stay negative, striving to reclaim the 20-day Simple Moving Average (SMA) of 101.60. A breakout above this level signals a buying opportunity and enhances the short-term outlook.
Support levels exist at 101.30, 101.15 and 101.00. Resistance lies at 101.80, 102.00 and 102.30.
US Dollar FAQs
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.
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.
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.
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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