US Dollar trims gains following Powell's inflation remarks
- US Dollar sees minor losses amid Jerome Powell's disinflation forecasts.
- JOLTs figure from June came in higher than expected.
- Expectations of interest rate cut in September remain steady ahead of key NFPs on Friday.
On Tuesday, the US Dollar, as per the DXY Index, showed a decrease in gains to hover near 105.70. The Greenback is influenced by rising JOLTS figures and Jerome Powell's comments about the inflation outlook.
Although the US is starting to exhibit signs of disinflation, and the markets anticipate a potential September rate cut, Federal Reserve (Fed) officials remain careful by adhering to their data-oriented approach. Jerome Powell showed some confidence on the inflation outlook but didn’t give clear signs that cuts would arrive sooner.
Daily digest market movers: US Dollar trims gains despite robust JOLTS data
- Job Openings and Labor Turnover Survey (JOLTS) released by the US Bureau of Labor Statistics (BLS) on Tuesday showed that job openings on the last business day of May totaled 8.14 million.
- This was a significant increase from April's 7.9 million (revised from 8.05 million), surpassing the market's forecast of 7.9 million.
- Key takeaways from Powell's remarks include his mentioning that wage increases are moving back down toward more sustainable levels, suggesting that the labor market is cooling off.
- In addition, he added that “Inflation may get back to 2% late next year or the following year," hinting at a slower-than-expected inflation rate.
- The week ends with a spotlight on June's Nonfarm Payrolls on Friday. Bloomberg's consensus reveals an expectation of 190K versus May's 272K, while the whisper number currently stands at 198K. Wage inflation and the Unemployment Rate will also be closely looked upon.
DXY technical outlook: Bullish momentum struggles though outlook still positive
Despite a muted contraction, the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) portray a robust landscape. The RSI remains above 50 with a slight flattening, while the MACD continues to display green bars, hinting at increased bullish momentum.
Resiliently above its 20, 100 and 200-day Simple Moving Averages (SMAs), the DXY remains steady at the highs observed since May, with both the 106.50 and 106.00 zones viewed as targets. Investors should also consider potential pullbacks toward the 105.50 and 105.00 zones in case bears step in.
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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