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The US dollar remains stable on a calm Monday, awaiting the US CPI.

  • The US dollar consolidates on Monday after last week's movements.
  • Monday's economic calendar is almost empty, and a very busy week is expected.
  • The US Dollar Index is trading around 105.30, in the middle of last week's range.

The US Dollar (USD) trades sideways and calm on Monday, with the Dollar Index (DXY) right in the middle of last week's range, at 105.30. The week starts off quietly on the economic data front, but will get busier as the days go by with the release of US Producer Price Index (PPI) numbers on Tuesday and the PPI data. Consumer Prices (CPI) on Wednesday.

On Monday, two members of the US Federal Reserve (Fed) will speak: Federal Reserve Vice Chairman Phillip Jefferson will deliver the keynote address and participate in a question and answer session at the Theory and Cleveland practice. Jefferson will be joined by Federal Reserve Bank of Cleveland President Loretta Mester in that same session. Both Fed speakers are voting members on this year's Federal Open Market Committee (FOMC).

Daily Market Summary: Boring Monday

  • A very calm start to the week is expected. No significant changes are observed in the quotes, except in the case of the Czech crown (USD/CZK), which depreciates against the Dollar by almost 0.50%.
  • At 13:00 GMT, Fed Vice Chairman Phillip Jefferson and Federal Reserve Bank of Cleveland President Loretta Mester will participate in a question and answer session at the Cleveland Theory and Practice conference.
  • The US Treasury Department will auction a 3-month bill and another 6-month bill at around 15:30 GMT.
  • Stock markets have started the week with ups and downs, after the German Dax recorded a new all-time high on Friday. Investors appear to be keeping their powder dry for this week.
  • CME's Fedwatch tool suggests a 96.5% probability that there will remain no change in the Federal Reserve's federal funds rate in June. Chances of a rate cut in July are also ruled out, while for September the tool shows a 48.6% chance of rates falling 25 basis points below current levels.
  • The yield on the 10-year US Treasury bond is trading around 4.48%, low levels for this Monday after previously reaching 4.94%.

US Dollar Index Technical Analysis: This was all, nothing to see here

The US Dollar Index (DXY) is entering a phase of weakness with the risk of relaxing a bit. Markets are considering three scenarios, two of which favor a weaker Dollar. Traders will be keeping a close eye on incoming data for confirmation on any of the three.

The first two scenarios that lead to a weaker US Dollar are stagflation or a spike in disinflation. With stagflation, economic growth would begin to deteriorate while inflation would remain high, which would put the Fed in the position of not being able to lower interest rates to soften the blow of the economic contraction. Meanwhile, a resumption of the disinflation trend could put the month of June back into play for a rate cut and trigger a soft landing. The only element that would strengthen the US dollar would be better economic data and inflation remaining high, as this scenario would open the door to further rate hikes.

To the upside, 105.52 (a pivotal level since April 11) must recover, ideally via a daily close above this level, before targeting the April 16 high at 106.52 for the third time. Further up and above the round level of 107.00, the DXY index could find resistance at 107.35, the October 3 high.

On the downside, the 55-day and 200-day simple moving averages (SMA) at 104.54 and 104.25, respectively, have already provided ample support. If these levels do not hold, the 100-day simple moving average, near 103.89, is the next best candidate.

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.

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, 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.

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 tightening 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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