US Dollar mildly weakens during Jerome Powell's testimony
- US Dollar slips slightly under impact of Jerome Powell's fresh words.
- Investors keenly await June’s CPI data release on Thursday for clear guidance.
- If CPI comes in soft on Thursday, USD is poised for further downside.
On Thursday, despite Powell's cautious stance at his visit to the House Financial Services Committee, the US Dollar (measured by the DXY index) saw minor downturns and fell to 105.00. Powell's reluctance toward immediate rate cuts and his hints at an ongoing assessment of data-driven indicators have kept the markets on edge.
Signs of disinflation in the US economic outlook have emerged, and the market confidence in the September rate cut remains strong. However, Federal Reserve (Fed) officials including Chair Jerome Powell continue to tread carefully, underlining their inclination toward data-dependent decisions rather than hastened action in implementing rate cuts.
Daily digest market movers: DXY down as markets continue assessing Powell’s sentiment
- Highlight of Wednesday were the words of Fed ChairPowell to the House Financial Services Committee.
- However, his testimony before the House did not provide any significant or fresh influences.
- Powell expressed the need to be watchful over the labor market, noting visible softening in the sector.
- He suggested that inflation might be moving toward lower levels but also mentioned his cautious optimism about it sustaining the 2% target. He also mentioned that he doesn't hold a specific inflation number pertaining to decisions on future cuts.
- Expectations from Thursday's Consumer Price Index (CPI) continue to be significant. Projections depict the headline sinking two tenths to 3.1% YoY, while core inflation is expected to stay steady at 3.4% YoY.
- Market sentiment indicates less than 10% chance of July rate cut, while betting odds for a September cut hover around 80%, according to the CME FedWatch Tool.
DXY technical outlook: Index sees some decline, DXY above 100-day SMA is a good sign
From a technical viewpoint, DXY seems to have slipped into a negative terrain, indicated by both the Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD) showing negative signs. Nevertheless, despite the minor setback on Wednesday, the DXY managed to stay above its 100-day Simple Moving Average (SMA), cushioning the impact of declines.
The subsequent support levels at 104.50 and 104.30 also continue to be staunch barriers against further drops. On the flip side, to regain momentum buyers must recover the 105.50 level to retest the 106.00 threshold.
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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