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Dollar extends losses as CPI figures confirm expectations of a rate cut in September

  • US Dollar Loses Momentum on Slowing CPI Figures
  • Markets are now more confident of a cut in September.
  • US Treasury yields are falling, causing traders to lose interest in the USD.

He American dollar The US dollar as measured by the DXY index fell further on Thursday, mainly due to slowing US Consumer Price Index (CPI) inflation figures, further strengthening the case for a September interest rate cut by the Federal Reserve (Fed).

While markets are increasingly confident about a rate cut, Fed officials remain cautious and have indicated they are in no rush to implement changes without thoroughly studying data-driven indicators.

Market Moves and Daily Drivers: DXY under pressure as inflation softens and markets expect a rate cut

  • Maintaining his previous stance, Fed Chairman Jerome Powell reiterated that the Fed’s work is not yet done when it comes to managing inflation and even suggested that the Fed has more work to do.
  • He said confidence to cut rates based on inflation alone is not yet sufficient, but also noted that the Fed does not need inflation to be below 2% before rate cuts begin.
  • On the data front, the US Consumer Price Index (CPI) for June reported a drop to 3% year-on-year from 3.3% in May, according to the US Bureau of Labor Statistics (BLS), below market expectations. The underlying measure rose 3.3% year-on-year, lower than the 3.4% expected.
  • Amid continued signs of easing inflation, market participants’ confidence in a possible rate cut in September is strengthening, putting downward pressure on the USD.

DXY Technical Outlook: Negative outlook intensifies as DXY loses 100-day SMA

The DXY index’s loss of its 10-day simple moving average (SMA) has created a negative outlook for the USD, with both indicators, the RSI and MACD, entering a negative trajectory.

The 100-day SMA threshold has been breached, intensifying the bearish tone. The next possible support for further declines could be seen at the 200-day SMA level, providing a critical bottom for the market.

The U.S. dollar

The United States 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 in circulation alongside local banknotes. As of 2022, it is the most traded currency in the world, accounting for over 88% of all global foreign exchange transactions, equivalent to an average of $6.6 trillion in daily transactions. Following World War II, the USD took over from the British Pound as the world’s reserve currency.

The single most important factor influencing the value of the US dollar is monetary policy, which is determined by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and to promote full employment. Its main tool for achieving these two goals is to adjust interest rates. When prices rise too quickly and inflation exceeds the Fed’s 2% target, the Fed raises rates, which helps the dollar. When inflation falls below 2% or the unemployment rate is too high, the Fed can lower interest rates, which weighs on the 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 jammed financial system. It is an unconventional policy measure used when credit has dried up because banks are not lending to each other (for 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 of 2008. It involves the Fed printing more dollars and using them to buy US government bonds, primarily from financial institutions. QE typically leads to a weakening of 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 of maturing securities in new purchases. It is generally positive for the US dollar.

Source: Fx Street

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