- The US Dollar DXY started the week on a down note after a brief bounce at the end of last week but managed to offset daily losses.
- President Joe Biden’s early exit from the presidential race has boosted investors’ risk appetite, which could limit the upside.
- Dovish Fed expectations could also pose a challenge for the USD.
Opening the week, the American dollarThe dollar, as measured by the DXY index, showed a dip towards the 104.30 area and then recovered to 104.40. The expected exit of US President Joe Biden from the presidential race has favoured former President Donald Trump, and this turmoil has led investors to lean towards riskier assets. Complementing this, the expectation of a dovish stance from the Federal Reserve continues to pose challenges for the Dollar. Other indicators to watch out for during the week are the revisions to the second quarter Gross Domestic Product (GDP) and Personal Consumption Expenditure (PCE), which are widely anticipated to add an element of volatility to the USD.
Although the US economy is showing early signs of disinflation, market confidence in a favorable September rate cut by the Federal Reserve remains firm. Still, Fed officials express a tense attitude and emphasize the importance of adhering to a data-dependent approach before rushing into any hasty interest rate reductions.
Daily Moves and Market Drivers: DXY has a bumpy ride due to the Fed policy outlook and the upcoming US elections.
- The Fed policy outlook and unstable US election politics continue to be the two main catalysts driving the USD trajectory.
- As former President Trump emerges as the front-runner following Joe Biden’s departure, investors will focus on three broad areas: immigration, tariffs and tax policies. Markets will therefore be on the lookout for clues from Trump about his economic plans.
- The CME FedWatch tool sheds light on the widespread anticipation of a September rate cut, as investors are pricing in a 25 basis point cut.
- Upcoming GDP and PCE data will likely shape USD dynamics for the week ahead as they guide markets on the Fed’s next moves.
DXY Technical Outlook: Bearish signals persist despite attempts to break above the 200-day SMA
The DXY index might have posted minor gains last week, but the bearish outlook remains unchanged, mainly as the index is facing difficulties in ascending above the 200-day simple moving average (SMA) at 104.30. The bearish stance is further supported by daily indicators such as the RSI and MACD, which remain in the negative territory, suggesting a continuation of the downward momentum.
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
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.
