- The US Dollar is holding on to its latest gains with the DXY above 106.00.
- Expectations of additional interest rate cuts by the Federal Reserve have diminished.
- Important US data releases this week will shape the outlook for monetary policy and forex.
The US Dollar Index (DXY), which measures the value of the USD against a basket of six currencies, is holding on to its latest gains in the US session on Tuesday. Expectations of additional interest rate cuts by the Federal Reserve (Fed) have diminished, and important US data releases in the coming weeks will shape the outlook for monetary policy. These include Consumer Price Index (CPI) data and retail sales later this week.
The DXY is anticipated to continue its bullish trend, supported by strong US economic fundamentals. The upcoming release of inflation data and retail sales figures are expected to strengthen the US Dollar. Despite profit taking and easing of labor conditions, the Fed remains optimistic about the economy, and the overall trend of the Dollar remains positive.
Daily Market Summary: US Dollar Recovery Continues, Fed Easing Expectations Change
- Fed easing expectations change with market pricing in only 70% chance of additional cut in December.
- The swaps market is pricing in around a 50% chance of a December cut, showing a significant change from the September valuation.
- The market is now pricing in 75 to 100 basis points of full easing over the next 12 months.
- Additionally, investors are pricing in a terminal rate near 3.5% compared to 2.5% in September.
- Fed officials are likely to reinforce the cautious tone this week.
DXY Technical Outlook: Dollar Nears Overbought Levels
The DXY index indicators are deep in positive territory, but the Relative Strength Index (RSI) sits near 70. Its proximity to overbought levels suggests a potential for a short-term pullback or consolidation. However, the overall technical outlook remains bullish, with indicators pointing to further upside potential.
In case of a correction, the 105.00-105.50 level could be used as support to consolidate gains.
The US Dollar FAQs
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. According to 2022 data, it is the most traded currency in the world, with more than 88% of all global currency exchange operations, equivalent to an average of $6.6 trillion in daily transactions. After World War II, the USD took over from the pound sterling 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: achieve price stability (control inflation) and promote full employment. Your main tool to achieve these two objectives is to adjust interest rates. When prices rise too quickly and inflation exceeds the 2% target set by the Fed, the Fed raises rates, which favors the price of 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 into a clogged financial system. This is an unconventional policy measure used when credit has dried up because banks do not lend to each other (for fear of counterparty default). It is a last resort when a simple lowering of 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 usually leads to a weakening of the US Dollar.
Quantitative tightening (QT) is the reverse process by which the Federal Reserve stops purchasing bonds from financial institutions and does not reinvest the principal of maturing portfolio securities in new purchases. It is usually positive for the US dollar.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
