US Dollar finds its footing, dovish bets steady
- Market continues to overestimate Fed easing with the central bank pushing back against dovish expectations.
- Economic data remains solid as S&P Global preliminary September PMIs come in above expectations.
- Fed officials will try to push back on the dovish rhetoric.
The US Dollar Index (DXY), which measures the value of the USD against a basket of currencies, whipsaws in a volatile session on Wednesday, hovering around a 14-month low due to intensifying recession fears. Despite the market's persistent higher estimation of Federal Reserve (Fed) easing, the central bank has countered dovish expectations. Friday’s Personal Consumption Expenditures (PCE) figures from August will be closely watched.
While the US economy exhibits a slowdown in certain sectors, other areas remain resilient, supporting overall economic activity. Despite this mixed picture, the Fed emphasizes that the path of interest rate adjustments will hinge on forthcoming economic data.
Daily digest market movers: US Dollar gains despite steady dovish bets, markets await PCE figures
- Market continues to overestimate the extent of Fed easing despite some Fed Governors’ efforts to curb dovish expectations.
- Market is pricing in 75 bps of easing by year-end and 175-200 bps of total cuts over the next 12 months.
- On Thursday, Gross Domestic Product (GDP) and Friday’s PCE figures will be key for the USD dynamics.
- It is worth noticing that Jerome Powell stated that the pace of the easing cycle will depend on incoming data, so their outcome might shake the USD. Fed Chair Jerome Powell will be on the wires on Thursday.
DXY technical outlook: Bearish momentum persists, bulls lack strength
The DXY has largely bearish tradewinds casting it about on the technical charts.
The Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD) gained some momentum, but the RSI remains below the negative zone, and the MACD continues to indicate flat green bars. These technical indicators suggest that the bears are in control and that buying pressure is weak.
Support levels can be found at 100.50, 100.30 and 100.00, while resistance levels are located at 101.00, 101.30 and 101.60.
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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