- The USD lost momentum on Tuesday although it remains above previous resistance levels.
- An improved risk environment and hopes of a dovish turn by the Fed have capped the US Dollar’s recovery.
- DXY: Below 104.55, the next targets are 1.0405 and 1.0365.
The US Dollar (USD) has turned lower during the early European trading session, with market sentiment improving somewhat. Israel has refrained from retaliating against Hizbullah in Lebanon after a deadly attack from the Iran-backed militias this week, which has eased concerns about further destabilization in a highly volatile area.
The US Dollar Index (DXY), however, remains above the previous week’s trading range, with investors wary of taking excessive risks ahead of Wednesday’s Federal Reserve (Fed) interest rate decision. The bank will highly likely leave rates unchanged, but the recent inflation and labor data might prompt Fed Chair Jerome Powell to deliver a more dovish message.
The bank’s latest dot plot suggested only a 25 bps cut in December, but the market is betting on two rate cuts, starting in September, and recent data supports that view. Any hint in that direction would increase negative pressure on the US Dollar.
Before that, the JOLTS Job Openings for June and the Conference Board’s Consumer Sentiment Index for July, due on Tuesday, are expected to show moderate contractions, which will provide the right framework for a dovish message from the central bank.
Daily digest market movers: US Dollar loses steam amid as risk aversion eases
- Risk appetite has returned on Tuesday, favoured by easing concerns about an escalation of the Middle East conflict. This is pushing risk assets higher and weighing on the safe-haven USD.
- Israeli authorities have affirmed that they are willing to avoid an all-out war in the Middle East. This has calmed markets, which are wary that the reaction would attract a direct involvement of Iran in the conflict.
- In the economic calendar on Tuesday, the US JOLTS Job Openings are expected to have dropped slightly, to 8.03 million in June from 8.14 million in May.
- Also today the Conference Board’s Consumer Sentiment Index is seen contracting to 99.5 in July from the 100.4 posted in the previous month.
- The main focus, however, is the Fed’s monetary policy meeting. Data from the CME Group Fed Watch Tool shows that markets are pricing only a 4.1% chance of an interest rate cut on Wednesday, while a 25 bps rate cut is fully priced for September.
- Data released last week showed that the US Personal Consumption Expenditures (PCE) Prices Index ticked down in June, although the core PCE remained at 2.6% year-over-year. This reading is close to the bank’s 2% inflation target and maintains hopes of a September rate cut alive.
DXY Technical Outlook: Support at 104.50 keeps bears at bay
The US Dollar Index (DXY) recovery has lost momentum on Tuesday, with risk assets bouncing up amid a more favorable environment. Bulls have been capped at 104.80 but the pair maintains its immediate bullish bias intact, with downside attempts capped above 104.55.
A further pullback below that level would put 104.05 back into play ahead of 103.65. On the upside, resistances are the mentioned 104.80 and 105.22.
US Dollar FAQs
The US 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 found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
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 stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the 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 in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker 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 from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
Source: US Dollar is looking for direction with all eyes on the Fed