US Dollar losses curbed by encouraging GDP figures

Jul 25, 2024 4:36 PM

US Dollar DXY trimmed losses after robust Q2 GDP figures
US economy appears to remain resilient but dovish bets on the Fed remain steady.
In the meantime, the Fed maintains a data-dependent stance and refrains from rushing into immediate cuts.

On Thursday, the US Dollar as presented by the DXY, experienced a mild surge after a stronger-than-expected Q2 Gross Domestic Product (GDP) report, balancing out previous losses and finding stability at 104.30. Despite this, the chances of a rate cut by the Federal Reserve (Fed) in September still remain high which appears to limit the upside to the Greenback.

The economic outlook for the US shows mixed signs but signals of impending disinflation make the market confident in a September cut by the Fed. Despite the pressure, bank officials remain reluctant to hastily implement cuts and maintain a data-dependent stance.

Daily digest market movers: US Dollar clears part of its daily loss after positive US Q2 GDP data

The US Gross Domestic Product (GDP) for the second quarter showed an expansion at an annual rate of 2.8%, according to the first estimate by the US Bureau of Economic Analysis, released on Thursday.
This positive reading, which exceeded the market expectation of 2%, follows a 1.4% growth reported in the first quarter.
Other data showed that Initial Jobless Claims for the week ending July 19, reported a better-than-expected figure of 235K.
On the negative side, June's Durable Goods Orders saw a significant drop of 6.6%.
The CME FedWatch Tool continues to suggest a probable rate cut in September.

DXY Technical outlook: Bearish signs linger despite strong support around the 200-day SMA

Despite the potential headwinds, the DXY index oscillates around the critical 200-day Simple Moving Average (SMA) line, which provides significant support. In the meantime, bearish signals persist as, both the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) remain within the negative territory. The completed bearish crossover between the 20 and 100-day SMA on Wednesday provided an additional sell signal to the markets.

Key support levels are identified at 104.30 (200-day SMA) and 104.00 while resistance is expected around 104.50 and 105.00.

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.