US Dollar recoups losses, traders focus on key economic figures
- US Dollar opens Tuesday with robust rebound.
- Fed officials maintain a cautious approach given mixed economic indicators.
- May’s PCE is the week’s highlight on Friday.
On Tuesday, the US Dollar, as portrayed by the Dollar Index (DXY), rose to 105.70 after opening the week on a soft note. A recovery in US yields appeared to overlook a slight dip in Consumer Sentiment data reported during the session.
From an economic perspective in the US, the picture continues to be mixed. A few signals of disinflation are noticeable, while most Federal Reserve (Fed) officials maintain a cautious approach.
Daily digest market movers: DXY shrugs off weak sentiment data on the back of hawkish bets
- On Tuesday, investors' attention was drawn by the Conference Board's Consumer Confidence Index. The figure slightly slipped to 100.4 from a revised 101.3 in May, indicating a somewhat tepid pace of consumer spending activity.
- Moving to Thursday, the Gross Domestic Product (GDP) revisions for the year are expected to remain at 1.3%.
- Friday will be a significant event as the May Personal Consumption Expenditures (PCE), a gauge of inflation favored by the Fed, is scheduled to be released.
- Both headline and core PCE are projected to ease to 2.6% YoY, down from 2.7% and 2.8%, respectively, in April.
- Expectations are high for a potential Fed rate cut in November, with a 70% probability of a cut happening as early as September.
- PCE data will play a crucial role in influencing market predictions.
Daily digest market movers: DXY shrugs off weak sentiment data on the back of hawkish bets
The technical outlook continues on a positive note, with indicators comfortably in the green. The Relative Strength Index (RSI) remains above 50 and trends upwards, while the Moving Average Convergence Divergence (MACD) is building green bars, suggesting a building of strength among bulls.
In addition, the DXY Index sustains its position above the 20, 100 and 200-day Simple Moving Averages (SMAs), which confirms an overall positive outlook.
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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