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The US dollar suffers a slight decline, awaiting the CPI

  • The DXY shows slight losses at 105.35, indicating a modest bearish trend.
  • Markets' attention is focused on the Fed's conservative comments and inflation expectations for April, which could condition the outlook for the US dollar.
  • Bets on the Fed remain firm and also provide support to the Dollar.

The US Dollar Index (DXY) is trading slightly lower at 105.35 in the US mid-session on Monday. The strength of the markets and the Federal Reserve's (Fed) stance to cut interest rates limit the losses of the US dollar. Any possible recovery of the Dollar will depend mainly on the main US data this week, in particular the Consumer Price Index (CPI) for April, which will be published on Wednesday.

The US economy continues to post solid growth in the second quarter, underpinning the dollar's recovery following the Fed's cautious comments. Signs that no rate cuts are imminent have adjusted market easing expectations, encouraging more cautious outlook. Fed officials' stance, while cautious, is largely data-driven, with key indicators such as the CPI and retail sales due out this week set the tone.

Daily summary of market movements: DXY drops slightly ahead of CPI

  • The Fed remains alert, limiting USD losses. Rate cuts are not imminent and the probability of a cut in June dropped from 10% to 5% early last week. The probability of a cut in July was reduced from 40% to approximately 25%.
  • Markets still expect a rate cut in November.
  • This week is crucial, since three important economic figures are expected: Producer Price Index (PPI), CPI and retail sales. Market forecasts point to persistent inflation and solid growth in the US, which will probably be verified with the next data, which would prolong the rise of the Dollar.

DXY Technical Analysis: DXY Reflects Likely Bearish Outlook Despite Bulls' Efforts

The current technical picture for DXY shows mixed signals leaning towards a more bearish outlook. The RSI prominently reveals a negative slope and is entrenched in negative territory. This points to a growing dominance of selling pressure, indicative of a weakening of the buying momentum and a possible bearish trend. Simultaneously, the Moving Average Convergence Divergence (MACD) shows flat red bars, a sign that despite a struggling bullish momentum, the bears are failing to advance strongly.

As for simple moving averages (SMAs), they exhibit intricate dynamics. The DXY is trading below the 20-day SMA, representing short-term bearish dominance. However, the fact that the index is still holding above the 100-day and 200-day SMAs could indicate possible long-term bullish pressure.

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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