- The US dollar falls slightly under the impact of Jerome Powell’s new words.
- Investors are eagerly awaiting the release of June CPI data on Thursday for clear guidance.
- If the CPI comes in lower on Thursday, the USD is set for a further decline.
On Thursday, despite Jerome Powell’s cautious stance in his visit to the House Financial Services Committee, the US Dollar (measured by the DXY index) saw minor declines and fell to 105.00. Powell’s reluctance towards immediate rate cuts and his hints about a continuous evaluation of data-driven indicators have kept the markets on edge.
Signs of disinflation in the US economic outlook have emerged, and market confidence in a September rate cut remains strong. However, Federal Reserve (Fed) officials, including Chairman Jerome Powell, continue to act cautiously, underlining their inclination toward data-driven decisions rather than hasty actions in implementing rate cuts.
Daily Market Moves: DXY down as markets continue to assess Powell sentiment
- The highlight of Wednesday was Fed Chairman Jerome Powell’s remarks before the House Financial Services Committee.
- However, his testimony before the House did not provide any significant or new insights.
- Powell stressed the need to keep an eye on the labor market, noting a visible weakening in the sector.
- He suggested inflation could be moving lower, but also mentioned his cautious optimism about maintaining the 2% target. He also said he has no specific inflation number to bear on decisions about further cuts.
- Expectations for Thursday’s Consumer Price Index (CPI) remain significant. Projections show headline inflation falling two-tenths to 3.1% year-on-year, while core inflation is expected to remain stable at 3.4% year-on-year.
- Market sentiment indicates a less than 10% chance of a rate cut in July, while bets for a cut in September are around 80%, according to the CME FedWatch tool.
DXY Technical Outlook: DXY looks set to decline, but if it rises above the 100-day SMA it is a good sign
From a technical standpoint, the DXY seems to have fallen into negative territory, indicated by the RSI and MACD showing negative signs. However, despite Wednesday’s minor setback, the DXY managed to hold above its 100-day Simple Moving Average (SMA), cushioning the impact of the declines.
The subsequent support levels at 104.50 and 104.30 also continue to be firm barriers against further declines. On the other hand, to regain momentum, buyers need to reclaim the 105.50 level to retest the 106.00 threshold.
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 transactions per day. 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.
