US Dollar gains after PCE figures
- US inflation, as measured by the PCE Price Index, remained unchanged at 2.5% YoY in July.
- The USD is gaining due to the strength of its economy while inflation is coming down
- The labor market is still the focus for September's decision
On Friday, the US Dollar, measured by the US Dollar Index (DXY), extended gains after the release of July's Personal Consumption Expenditures (PCE) Index, which showed inflation continuing to be kept at bay.
With inflation coming down and economic activity steady, the outlook justifies rate cuts by the Federal Reserve (Fed), whose chairman has already stated that there will be a cut in September. However, the PCE print may not have been dovish enough to persuade the central bank to start with a 50-basis-point cut.
Daily digest market movers: DXY gains ground after PCE figures
- Personal Consumption Expenditures (PCE) Price Index, the Federal Reserve's (Fed) preferred inflation gauge, remained unchanged at 2.5% on a yearly basis in July, below the market expectation of 2.6%.
- Core PCE Price Index, excluding volatile food and energy prices, also matched June's increase at 2.6%, below the market forecast of 2.7%.
- The data suggests that inflation is coming down, but the pace of the cutting cycle will be dictated by the incoming labor market data.
- CME FedWatch tool now shows a near 30% probability of a 50-basis-point rate cut in September, which has slightly declined.
Technical outlook: Bullish momentum increases, target now at 102.00
Technical analysis indicates a potential recovery for the DXY index. The Relative Strength Index (RSI) is trending upward, while the Moving Average Convergence Divergence (MACD) is printing lower red bars. If the DXY remains above the 101.00 level, it could trigger a rally toward the 20-day Simple Moving Average (SMA) at 102.00. That being said, the overall outlook is negative, but a recovery of the mentioned SMA might flip the table.
Key support levels are at 100.50, 100.30 and 100.00, while resistance levels are at 101.70, 101.80 and 102.00.
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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