US Dollar flat with Powell set to head for Capitol Hill

Jul 9, 2024 11:19 AM

The US Dollar trades flat on Tuesday after a choppy Monday session.
Focus shifts to Fed Chairman Jerome Powell as French political headlines fade.
The US Dollar index hovers around 105.00 with a small bounce-off support.

The US Dollar (USD) trades roughly flat in the European session on Tuesday, with the dust settling over the French election outcome. Headlines are fading fast, and markets are digesting the results quite quickly. The main takeaway is that not much will change for France, seeing the near-impossible coalition formation. Traders do not bother any further on Tuesday and instead focus on US Federal Reserve (Fed) Chairman Jerome Powell, who will deliver a testimony at the Congressional Financial Committee on monetary policy and the US economy.

On the economic front, some relatively soft and third-party data come out from the National Federation of Independent Business (NFIB) and the TechnoMetrica Institute of Policy and Politics (TIPP). On the central banking front, as already mentioned, all eyes will be on Fed Chairman Powell. Though Federal Reserve Vice Chair for Supervision Michael Barr and Federal Reserve Governor Michelle Bowman should not be disregarded for possibly delivering some good remarks during the day.

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The dust is settling quickly over the French election news. Expect this topic to fade into the background completely, as it will take a long time before any coalition will get formed in France.
The National Federation of Independent Business (NFIB) already has released its numbers: the monthly Business Optimism Index for June jumped from 90.5 to 91.5, beating the 89.5 estimate.
At 12:55 GMT, the weekly Redbook Index for the week ending July 5 is expected. The previous week, the number came in at 5.8%.
At 14:00 GMT, the TechnoMetrica Institute of Policy and Politics (TIPP) will release the Economic Optimism Index for July. The previous reading was at 40.5, with no forecast available.
The US Treasury will allocate a 52-week bill at 15:30 GMT and a 3-year note at 17:00 GMT.
Three US Federal Reserve speakers are making their way to the stage on Tuesday:
- At 13:15 GMT, Federal Reserve Vice Chair for Supervision Michael Barr gives a speech titled "Financial Inclusion: Past, Present, and Hopes for the Future" at the Financial Inclusion Practices and Innovation Conference, in Washington, United States.
- Fed Chairman Jerome Powell delivers “The Semiannual Monetary Policy Report" to the US Congress in Washington. His speech will be published in full just minutes before his verbal delivery at Congress begins near 14:00 GMT.
- At 17:30 GMT, Federal Reserve Governor Michelle Bowman delivers a speech titled "Promoting an Inclusive Financial System" at the Financial Inclusion Practices and Innovation Conference, in Washington.
This morning, equity markets painted a remarkable picture: both Asian and US indices are up, while Europe is lagging, with all major European indices down.
The CME Fedwatch Tool is broadly backing a rate cut in September despite recent comments from Fed officials. The odds now stand at 73.6% for a 25-basis-point cut. A rate pause stands at a 22.9% chance, while a 50-basis-point rate cut has a slim 3.5% possibility.
The US 10-year benchmark rate trades at 4.29%, near its weekly low.

US Dollar Index Technical Analysis: Powell to say boring things

The US Dollar Index (DXY) is back to square one this week after the small losses registered on Monday that occurred on the back of the French election outcome in Europe. With a government formation now in total gridlock, markets can write off France for the coming months as no risk anymore and quickly dial in on the speech from US Federal Reserve Chairman Jerome Powell. Expectations are that Powell will repeat that the Fed remains data-dependent, more needs to be done, though that disinflation is on the right trajectory with rates remaining stable, pushing forward any change in monetary stance to the Jackson Hole Symposium by late August.

On the upside, the 55-day Simple Moving Average (SMA) at 105.16 remains the first resistance. Should that level be reclaimed again, 105.53 and 105.89 are the next nearby pivotal levels. In case Fed Chairman Powell delivers some hawkish comments before Congress, the red descending trend line in the chart around 106.23 and April’s peak at 106.52 could come into play.

On the downside, the risk of a nosedive move is increasing, with only the double support at 104.78, which is the confluence of the 100-day SMA and the green ascending trend line from December 2023, still in place. Should that double layer give way, the 200-day SMA at 104.43 is the gatekeeper that should catch the DXY and avoid further declines. Further down, the correction could head to 104.00 as an initial stage.

US Dollar Index: Daily Chart

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.