- After a shaky Monday, the USD has recovered, and is unlikely to see much movement on Tuesday.
- Amid renewed market sentiment, the US Dollar (DXY) is gaining and holding near the 103.00 mark.
- The market is pricing in a 100 basis point rate cut by the end of the year.
On Tuesday, the United States Dollar (USD)The dollar, as measured by the DXY Index, is capitalizing on recent recovery gains near 103.00 following an improvement in market sentiment. Moreover, caution due to the absence of news on the Middle East conflict between Iran and Israel is also supporting the current position of the Dollar. However, the Dollar’s ​​trajectory throughout the day could potentially be limited by the high dovish expectations on the Federal Reserve (Fed).
Markets are seeing the US economic outlook as weak due to soft July data and seem to fear a recession, while officials are urging the public not to overreact to a single piece of data.
Daily Market Wrap: USD upside limited as markets price in 100 basis point Fed easing by year-end
- Despite the USD gains, its potential is limited by continued dovish Fed expectations.
- The market anticipates a rate cut in September, leading to a subsequent weakening of the USD.
- Furthermore, the market is pricing in a 100 basis point rate cut by year-end, with some likelihood of an additional 25 basis points.
- More than 200 basis points of full easing are discounted for next year, barring a deep US recession.
- The market is eagerly awaiting incoming data to assess the Fed’s easing narrative.
DXY Technical Outlook: Bulls Step In, Bears Still Rule
On the technical side, the outlook for the DXY turned bearish after a sharp drop in the RSI, which fell into oversold territory in the past few trading sessions but seemed to recover on Tuesday. However, the outlook remains bearish, with the index still trading below the 20-, 100- and 200-day simple moving averages (SMAs).
Supports: 102.50, 102.20, 102.00
Resistances: 103.00, 103.50, 104.00
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.
