US Dollar Index consolidates near 104.30 with focus on US Q2 GDP, core PCE Inflation

Jul 25, 2024 7:49 AM

The US Dollar Index trades back and forth around 104.30 with US Q2 GDP in focus.
Market sentiment remains risk averse amid uncertainty over US presidential elections.
The US core PCE will indicate whether market speculation for Fed rate cuts in September is appropriate.

The US Dollar Index (DXY) trades in a tight range near 104.30 in Thursday’s European session. The US Dollar (USD) stays quiet as investors await the United States (US) Q2 flash Gross Domestic Product (GDP) data, which will be published at 12:30 GMT. The GDP data will indicate the current status of the economy’s health.

According to the estimates, the US economy expanded at a faster pace of 2% from the former reading of 1.4%, on an annualized basis, which is above Fed’s forecast of 1.8% non-inflationary growth. Investors will also focus on the GDP Price Index, which will indicate a change in the prices of goods and services produced. The GDP Price Index is estimated to have decelerated to 2.6% from the prior release of 3.1%. This would diminish fears of inflation remaining persistent.

Alongwith GDP numbers, investors will also focus on the US Durable Goods Orders for June. New Orders for Durable Goods is expected to have increased by 0.3% from 0.1% in May.

Meanwhile, the major trigger for the US Dollar will be the US Personal Consumption Expenditure Price Index (PCE) data for June, which will be published on Friday. The core PCE inflation, a Federal Reserve’s (Fed) preferred inflation tool, is estimated to have decelerated to 2.5% from May’s figure of 2.6%, with the monthly figure growing steadily by 0.1%. The scenario of expected or higher decline in inflationary pressures would cement expectations of Fed rate cuts in September. On the contrary, soft numbers will weaken the same.

The market sentiment remains risk-averse amid deepening uncertainty over US presidential elections. S&P 500 futures have surrendered gains posted in Asian trading hours. 10-year US Treasury yields tumble to 4.24%.

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.