US Dollar recovers as selling pressure eases
- US Dollar recovers after declining on Friday due to Powell's dovish remarks.
- Markets anticipate 100 bps of easing by year-end and 200 bps total over the next 12 months.
- Focus turns to PCE data later this week.
The US Dollar, measured by the US Dollar Index (DXY), regained some ground on Monday, hovering around 101.00 after it had plummeting last week. Friday’s decline was attributed to Federal Reserve (Fed) Chair Jerome Powell's dovish remarks at the Jackson Hole Symposium, hinting at a potential shift toward a looser monetary policy stance by the central bank. This, in turn, caused the 10-year US yield to dip beneath 3.8%, which weighed heavily on the USD.
Despite positive economic growth that exceeds expectations, the market's eagerness for aggressive monetary easing appears misplaced. The current situation warrants caution, as the totality of data points toward a disconnect between economic fundamentals and market pricing.
Daily digest market movers: US Dollar remains vulnerable following Powell's dovish remarks
- Markets digest Powell’s dovish Jackson Hole speech with further easing expected.
- Powell signaled a shift in Fed policy, stating that "the time has come for policy to adjust."
- He also emphasized the importance of the labor market, noting an "unmistakable" slowdown.
- 100 bps of easing is predicted by year-end, with 200 bps total over the next 12 months.
- Odds of a 50 bps cut in September are 30-35%, contingent on upcoming data.
- Market participants await the August NFP report for further guidance on the Fed's path.
- This Friday’s Personal Consumption Expenditures (PCE) figures from July will be key.
DXY technical outlook: DXY finds support, bullish momentum might build
The DXY index has found support at its lowest levels since December, indicating a temporary pause in selling pressure. The Relative Strength Index (RSI) remains deep in oversold territory, suggesting that there is potential for further upward corrective movements.
The Moving Average Convergence Divergence (MACD) is exhibiting steady red bars, aligning with the RSI and providing additional evidence of potential upward momentum as there is more room to correct. That being said, there are no clear signs of a reversal and the DXY is exposed for further downside.
Key support levels to monitor are 100.50, 100.30 and 100.00, while resistance levels to watch are 101.00, 101.50 and 101.80.
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.