US Dollar holds ground, closes a winning week
- Notable monetary divergence between Fed, G10 peers keeps USD afloat.
- Markets await further economic reports for insights into the US economy’s health for potential adjustments to Fed expectations.
- Next week’s highlight will be April’s US CPI.
The US Dollar Index (DXY) is currently trading around the 105.35 mark, posting mild gains on Friday near the end of the trading week. The Greenback holds its ground but seems stuck as markets await drivers to continue placing their bets on the next Federal Reserve (Fed) decisions.
The US economy remains on shaky ground, and markets are expecting signs of decelerating inflation, which gives the Fed confidence to start cutting. In the meantime, the bank’s officials remain hawkish.
Daily digest market movers: DXY remains firm as markets digest Fed speaker’s words
- San Francisco Fed President Mary Daly emphasizes need for prolonged restrictive policy to achieve Fed’s inflation targets.
- Atlanta Fed President Raphael Bostic hinted at a possible economic deceleration. The exact timeline for rate cuts, however, remains uncertain in his view.
- Overall, Fed remains careful concerning initiation of easing policy. Despite a few Fed officials expecting a single rate cut this year, majority of market predictions foresee rate cuts starting in September. This conservative Fed strategy starkly opposes Powell’s dovish indications from last week.
- Outcome of April’s Consumer Price Index (CPI) will be key for markets to continue shaping their expectations.
DXY technical analysis: DXY showcases mixed sentiment with both bulls and bears struggling for strength
The indicators on the daily chart are radiating a rather mixed picture. On one hand, the Relative Strength Index (RSI) plots a positive slope but remains in negative territory. This indicates that while the selling pressure is currently stronger, buying momentum is slowly creeping up, suggesting a potential shift in the near future.
Similarly, the Moving Average Convergence Divergence (MACD) sticks with flat red bars, indicating no strong impulse from either side.
The Simple Moving Averages (SMAs) also carry a mixed signal. Despite the DXY falling below the 20-day SMA due to bearish interference, it remains above both the 100-day and 200-day SMAs. This scenario indicates that while bears have been successful in shaping the short-term trajectory, bulls retain control over the medium to long-term trend.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.