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Dollar stays sideways as government shutdown risk looms ahead of Powell’s speech

  • The US Dollar moves slightly positive on Tuesday after a minor loss on Monday.
  • Traders are likely to keep their powder dry for Wednesday’s Fed interest rate decision.
  • The DXY Dollar Index is above 105.00, struggling to reach new highs.

The US Dollar (USD) took a small step back at the start of this week with traders focusing on Wednesday’s main event with the US Federal Reserve (Fed) rate decision. No rate hike is expected. interest rates, although with the recent rise in general inflation through energy prices, US Fed Chairman Jerome Powell could be tougher than expected.

Traders, meanwhile, have to divide their attention between the Fed and Capitol Hill, with a possible US government shutdown looming again. On Thursday, House Speaker Kevin McCarthy is scheduled to present a new stopgap bill for his vote. If the House of Representatives does not pass the bill, the likelihood of a shutdown in October is increasing.

Daily summary: Dollar softens

  • After the calm on Monday, US real estate data will be published this Tuesday at 12:30 GMT. Building permits are expected to hold steady near 1,445,000, up slightly from 1,443,000 in July. For its part, housing starts would go from 1,443,000 to 1,445,000.
  • Around 12:55 GMT the US Redbook will be published. The previous figure was 4.6%.
  • The US Treasury will auction 20-year Treasury bonds.
  • Stock markets are negative this Tuesday ahead of the US Fed meeting. Several negotiation tables report a collection of profits due to the possible failure of the provisional law to avoid the closure of the US Government.
  • The CME Group’s FedWatch tool shows that markets are 99% pricing in the likelihood that the Federal Reserve will keep interest rates unchanged at its September meeting. However, traders will need to keep an eye on any hawkish speech from Powell as inflation has been rising recently.
  • The 10-year US Treasury yield is trading at 4.31% and peaked early Monday before starting to sell off. A small flight to safe havens with the purchase of US bonds triggers a decline in yields.

Technical Analysis of the DXY Dollar Index: Selling Pressure

The US Dollar faced some selling pressure on Monday, which is actually not a bad thing as such. Following a ninth consecutive week of gains for the DXY US Dollar Index, the Relative Strength Index (RSI) is a bit in overbought territory. A few days of sideways to bearish would help cool the recovery a bit before entering the next leg higher, where the US Fed’s rate decision could act as a catalyst.

The DXY Dollar Index has risen to 105.41. It is just a breath away from the 2023 high, near 105.88. If the DXY index manages to close the week above this level, the Dollar is expected to strengthen further in the medium term.

On the downside, the 104.44 level seen on August 25 held support for the DXY index on Monday, preventing further selling of the DXY. If the rally that started on September 12 reverses and the 104.44 level gives way, there could be a significant pullback to 103.04, where the 200-day SMA comes into play as support.

US Dollar FAQ

What is the US 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. 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. For most of its history, the US dollar was backed by gold, until the Bretton Woods Agreement of 1971, when the gold standard disappeared.

How do the decisions of the Federal Reserve affect the Dollar?

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, it 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.

What is Quantitative Easing and how does it influence 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.

What is Quantitative Hardening and how does it influence 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

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