US Dollar struggles with mixed PCE figures and rate cuts bets
- US Dollar DXY struggling to rebound amid mixed PCE figures and anticipations of Fed cuts.
- Possibility of a rate cut by the Fed in September remains, though somewhat toned down.
- All eyes are now on next week’s FOMC decision.
On Friday, the US Dollar, as depicted by the DXY, displayed some resilience despite encountering daily losses post the release of mixed Personal Consumption Expenditures (PCE) data. The market continues to wrestle with the prospect of a rate cut in September by the Federal Reserve (Fed), even though expectations have somewhat softened.
Signs of disinflation in the US economy have begun to surface, thereby boosting confidence in a potential rate cut come September. Yet, Federal Reserve officials remain cautious and data-dependant so next week’s meeting will be crucial for the short-term market’s dynamics.
Daily digest market movers: US Dollar on shaky ground with mixed PCE data
- The annual core PCE, excluding volatile food and energy items, revealed a steady growth of 2.6%, contradicting economists' prediction of deceleration at 2.5%.
- The monthly core PCE inflation, the Fed's favored inflation tool, rose beyond the former and expected data of 0.1% to reach 0.2%.
- Though this higher growth pace is considered consistent, it falls short of dampening expectations that the Federal Reserve will roll out reduced interest rates by the September meeting, projecting two cuts this year.
- Next week’s Federal Open Market Committee (FOMC) will provide markets with additional guidance on the bank’s stance.
DXY Technical outlook: Bearish tendencies persist despite, index side-ways trade
Even though the DXY Index is battling to hold onto the 200-day Simple Moving Average (SMA), bearish signs continue to persist. The direction of the index thus now largely depends on whether the DXY can maintain the mentioned SMA but what likely is that the index might side-ways trade in the next sessions as indicators including the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) remain in negative zone but flattened.
Supports are noted at 104.15 and 104.00 levels, while resistances are observed at 104.30 and 104.50 levels.
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.
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