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US Dollar Strength Continues as Market Digests Consumer Sentiment Figures

  • The DXY rally extends into Friday, reaching its highest level since early May.
  • Consumer confidence according to UoM figures disappointed expectations, affecting market sentiment, but DXY maintains its daily gains.
  • US Treasury yields remain low, signaling a risk-off market environment.

On Friday, the US Dollar Index (DXY) ignored the weak data and continued its positive traction. The DXY now sits around its highest level since early May, near 105.80, and then retreated to 105.60, but maintained the daily gains.

The economic outlook for the US remains mixed. The Federal Reserve (Fed) continues to keep its revisions of economic activity stable, but revised upwards its estimates of Personal Consumption Expenditures (PCE). Additionally, preliminary analysis suggests slowing inflation but a resilient labor market, leading the Fed to anticipate fewer rate cuts. On Friday,

Consumer confidence data from the University of Michigan showed poor results that hit a seven-month low. This caused the USD to trim some of its daily gains, as much of the US economy revolves around consumer spending.

Daily Market Summary: DXY holds firm after UoM data, markets adjust to Fed decision

  • On Wednesday, the FOMC dot chart update shows a median expectation of just one rate cut by 2024.
  • Markets previously anticipated between one or two rate cuts in 2024, but this changed after the Fed announced its decision.
  • The University of Michigan Consumer Confidence Index for the US has fallen from 69.1 in May to 65.6 in early June, which is below the market expectation of 72. This drop was also reflected in the Index. of Current Conditions, which fell from 69.6 to 62.5.
  • The consumer expectations index also fell slightly from 68.8 to 67.6. The five-year inflation outlook increased from 3% to 3.1%.

DXY Technical Analysis: Bulls continue to dominate, holding above SMAs

In Friday’s session, technical indicators maintain their positive outlook. The RSI remains above 50 and the MACD continues to reflect green signal bars. Furthermore, the index remains above its 20-, 100-, and 200-day SMAs. The combination of these factors strengthens the bullish outlook for the DXY.

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. 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.

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.

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.

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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