US Dollar shows gains after GDP data and Fed official's cautious stance
- Atlanta Fed President Bostic is cautious about rate cuts and prefers to see more data before easing.
- Revised GDP growth of 3% in Q2 highlights the resilience of the US economy.
- Jobless claims came in better than expected.
The US Dollar, measured by the US Dollar Index (DXY), saw further gains above 101.00 on Thursday. The 10-year US yield holds above 3.8%, supporting the Greenback. US stock index futures trade mixed following Nvidia earnings, which could impact risk appetite and the US Dollar's demand as a safe-haven currency. On the data front, Gross Domestic Product (GDP) revisions highlight US economic resilience.
The US economy remains robust, exceeding expectations. However, market sentiment appears overly optimistic, with expectations of aggressive monetary easing.
Daily digest market movers: US Dollar extends gains after GDP revisions
- Atlanta Fed President Raphael Bostic, a leading FOMC hawk, expressed caution about imminent rate cuts, citing robust labor market conditions and elevated inflation.
- About 100 bps of easing is anticipated by year-end and 200 basis points over the following year.
- The odds of a 50-basis-point cut in September remain within the 30-35% range.
- Contrary to expectations, the Bureau of Economic Analysis revised Q2 annualized real GDP growth upwards to 3% from 2.8%.
- New unemployment insurance claims in the US declined slightly to 231K for the week ending August 23, marginally below market estimates.
DXY technical outlook: Index indicates potential recovery, resistance at 101.50
Indicators suggest a potential recovery for the DXY, with the Relative Strength Index (RSI) trending upward and the Moving Average Convergence Divergence (MACD) indicator printing lower red bars.
A consolidation above the 101.00 support level could trigger a rally. Key supports include 100.50, 100.30 and 100.00, while resistances are located at 101.50, 101.80 and 102.00.
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.
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