US Dollar eases as touche as PCE inflation, Durable Goods data are about to be released

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  • US Dollar is abating a little bit against most G7 pairs after its big rally this week, awaiting a string of macroeconomic data this Friday.
  • US debt-ceiling talks continue into Friday, Biden mentions possible spending freeze and denies default.
  • US Dollar Index lets loose of 104 and retreats to 103.85  while awaiting US macroeconomic data in order to decide to either break lower or head another leg higher.

The US Dollar (USD) is easing a bit on Friday under some profit taking after its gains this week, while traders are hearing signals out of Washington on the debt ceiling debate and a slew of US data is set to hit the wires this Friday. The US debt ceiling keeps making headlines, with more details being released about a possible deal, although an agreement this week looks almost close to impossible. US President Joe Biden gave more details on Thursday night about the talks and reiterated that there will be no default on his watch. 

On the macroeconomic data front, a big batch of important data is about to hit the markets. At 12:30 GMT, the Fed’s preferred inflation metric is being published – the Personal Consumption Expenditure (PCE) inflation numbers, both core and overall for monthly and yearly performances. These numbers have the potential to shift market expectations for the next Federal Reserve interest rate decision in June and July, thus being an important market-mover for US Dollar traders. 

Personal Spending and Income figures, together with Durable Goods Orders and Inventories data, will be hitting the wires at that same time. To close off the batch of macroeconomic data for the US, the University of Michigan is set to issue its May Final reading for Consumer Sentiment and Inflation Expectations. These numbers could help round-up moves on US Dollar, Treasury yields and other assets. 

Daily digest: US Dollar sees some profit taking as debt ceiling proposal takes form

  • US equity futures are mildly in the green after a subdued start this Friday, while the Chinese Hang Seng Index closed nearly 2% lower and sees Europe looking for direction still. 
  • The CME Group FedWatch Tool shows that markets are pricing in a 73% chance of rate hike for July and even June is now at a 33% chance for a hike. A big shift is being noticed ats well for the September expectations: A  rate cut expectation has been turned into a 52% possibility of a rate hike. The data coming out this Friday could lock in that rate hike for July and see a more than 50% chance for June and September rate hike. 
  • US President Joe Biden commented after the last debt-ceiling meeting that a proposal is on the table for a spending freeze for two years, and reiterated again there will be no default. Meanwhile GOP debt negotiators gave ground on defence spending demands. 
  • Negotiator Garret Graves said that finding a debt-limit deal this Friday will be hard. 
  • US Credit Default Swaps (CDS) eases a touch to 163.875 after peaking at 165.83 on Thursday. The peak was last week on Monday at 177.62 when concerns for a default were at the highest. 
  • Fitch places Fannie Mae and Freddie Mac ratings on watch. 
  • US Treasury Cash balance dropped to $49.5 billion on Wednesday. 
  • The benchmark 10-year US Treasury bond yield trades at 3.79% and are holding at that level after briefly hitting 3.82%, awaiting further guidance from the data later this Friday. 

US Dollar Index technical analysis: USD slips below 104 in the wake of US data

The US Dollar Index (DXY) has taken out both the 55-day and the 100-day Simple Moving Averages (SMA), respectively, at 102.43 and 102.85 on the upside. The US Dollar safe-haven status keeps seeing bids for the DXY, with 104 having been broken early on Thursday and now eases a touch as a debt-ceiling deal takes some shape. 

On the upside, 105.73 (200-day SMA) still acts as long-term price target to hit, as the next upside key level for the US Dollar Index is at 104.00 (psychological, static level), and acts as an intermediary element to cross the open space.

On the downside, 102.85 (100-day SMA) aligns as the first support level to confirm a change of trend. In the case that breaks down, watch how the DXY reacts at the 55-day SMA at 102.48 in order to assess any further downturn or upturn. 

Federal Rerserve FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

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.

How often does the Fed hold monetary policy meetings?

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.

What is Quantitative Easing (QE) and how does it impact USD?

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.

What is Quantitative Tightening (QT) and how does it impact 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.