- USD is pressured by a pullback in US Treasury yields due to anticipated clarity on the Fed’s policy.
- Fed officials express concern over potential easing with the US economy growing above trend.
- Investors await Powell’s remarks at the Jackson Hole Symposium on Thursday.
On Monday, the US Dollar (USD), measured by the US Dollar Index (DXY), declined to its lowest level since January around 102.20 following a pullback in US Treasury yields. Market participants are awaiting clarity on the Federal Reserve’s (Fed) policy outlook.
Despite the modest setback, the US economy indicates sustained progress above trend, which suggests the market may be overestimating aggressive future easing.
Daily digest market movers: US Dollar weakens as market anticipates strong Fed easing
- DXY Index is expected to weaken in the short term due to the market’s perception that the Fed is set to relax monetary policy in light of recent data indicating an economic slowdown.
- July Retail Sales report showed a stronger-than-expected rise, signaling resilient consumer spending and suggesting the US economy may not be as weak as feared.
- The robust labor market continues to drive wage increases, supporting consumer spending and suggesting no immediate recession threat.
- This suggests that the market seems to be overestimating the Fed, and that might get a surprise if the bank delays the cutting cycle.
- On Thursday and Friday, Fed Chair Jerome Powell will be on the wires at the Jackson Hole Symposium, where markets will look for clues regarding the next steps.
DXY technical outlook: A weakening bias persists and DXY loses key support
The technical indicators for the DXY Index are consolidating, albeit in negative territory, reflecting subdued price action with the Relative Strength Index (RSI) down deeply near 30. The Moving Average Convergence Divergence (MACD) bars appear to be growing red, suggesting consistent selling pressure. The index break signals the end of sideways trading in the 102.50-103.30 channel, which strengthens selling arguments.
Support Levels: 102.20, 102.00, 101.80
Resistance Levels: 103.00, 103.50, 104.00
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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