US Dollar extends losses as soft inflation data confirms market's September rate cut expectations
- US Dollar loses momentum on decelerating CPI figures.
- Markets now are more certain of September cut.
- US Treasury yields fall, making traders lose interest in USD.
The US Dollar measured by the DXY index slipped further on Thursday, mainly due to the decelerating inflation figures from the US Consumer Price Index (CPI), which makes an even better case for a September interest rate cut by the Federal Reserve (Fed).
Though markets are getting increasingly confident about the rate cut, Fed officials remain cautious and have indicated that they are not in a hurry to implement changes without studying data-driven indicators thoroughly.
Daily digest market movers: DXY under stress as inflation softens and markets expect a rate cut
- Keeping with his earlier stance, Fed Chair Powell reiterated that the Fed's job is not yet done when it comes to managing inflation and even suggested the Fed has more work to do.
- He indicated that the confidence to lower rates based solely on inflation is not sufficient yet, but also pointed out that the Fed doesn’t need inflation to be under 2% before rate cuts begin.
- On the data front, the US Consumer Price Index (CPI) for June reported a decline to 3% YoY from 3.3% in May as per the US Bureau of Labor Statistics (BLS), below the market's expectations. The core measure rose by 3.3% YoY, lower than the 3.4% expected.
- Amid continued signs of inflation softening, market participants' confidence in a potential rate cut in September strengthens, placing downward pressure on USD.
DXY technical outlook: Negative outlook intensifies as DXY loses 100-day SMA
The DXY index losing its 10-day Simple Moving Average (SMA) has stirred up a negative outlook for the USD with both the Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD) indicators swinging into negative trajectory.
The 100-day SMA threshold has been breached, intensifying the bearish tone. The next potential backstop for further declines could be noted at the 200-day SMA level, providing a critical bottom for the market.
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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