US Dollar loses stride, hangs on key economic figures

Jun 24, 2024 4:37 PM

US Dollar closed out a strong week and opened Monday on a soft note.
Fed officials offer cautionary advice concerning easing cycles amidst mixed signals in the economic outlook.
May’s PCE data will be key, as well as GDP revisions.

On Monday, the US Dollar, as portrayed by the Dollar Index (DXY), declined to 105.50, following a series of gains since early May, with investors seeming to capitalize on profits ahead of a tumultuous week.

As for the US economic outlook, a mixed picture prevails with some signs of disinflation. However, Federal Reserve (Fed) officials have chosen a cautious stance and have yet to fully adopt easing cycles. This guarded approach by the Fed continues to create an atmosphere of suspense regarding market expectations.

Daily digest market movers: US Dollar staying course, eyes on crucial data

On Tuesday, investors will eye the Conference Board confidence report. Headline figures are expected to drop slightly to 100, hinting at tepid consumer spending activity.
Moving to Thursday, the Gross Domestic Product (GDP) revisions for the year are anticipated to hold steady at 1.3%.
Friday will signify a pivotal event as the May Personal Consumption Expenditures (PCE), the Fed’s preferred gauge of inflation data is due for release.
Both headline and core PCE are expected to drop to 2.6% YoY from 2.7% and 2.8%, respectively, in April.
Despite encouraging progress on inflation, multiple Fed officials, including Chair Powell, recommended that markets maintain composure and not exaggerate the implications of one or two months of favorable data.
However, the market pins November as the most likely time frame for a cut but is expecting a 70% chance of a cut in September. Forthcoming data will prove to be instrumental in creating market bets.

DXY technical analysis: Positive trajectory maintained despite losses

The technical environment still portrays a positive layout with indicators situated in favorable territory. The Relative Strength Index (RSI) remains above 50, however, it inclines downward. The Moving Average Convergence Divergence (MACD) keeps constructing green bars, implying that bulls seem to be holding their grip.

Consistently, the DXY Index retains its stance above the 20, 100 and 200-day Simple Moving Averages (SMAs). Coupling these conditions with climbing indicators, it seems that the US Dollar (USD) could witness additional gains, mainly if it holds the 20-day SMA.

US Dollar FAQs

What is the US Dollar?

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.

How do the decisions of the Federal Reserve impact the US Dollar?

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.

What is Quantitative Easing and how does it influence the US Dollar?

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.

What is Quantitative Tightening and how does it influence the 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.

Disclaimer: For information purposes only. Past performance is not indicative of future results.