US Dollar falls flat on quiet Tuesday
- US Dollar Index remains neutral on Tuesday near the key 103.00 level.
- Fed officials remain cautious about easing policy too much, too soon.
- CPI figures on Thursday will be key for DXY movement.
The US Dollar Index (DXY), which measures the value of the USD against a basket of six currencies, remains flat on Tuesday. Despite the initial surge, the DXY has settled around 102.50 and is awaiting further direction.
Economic indicators suggest mixed signals for the US economy. While some data points to a slowdown, other metrics indicate ongoing resilience. The Federal Reserve (Fed) has emphasized that its approach to monetary policy easing will be guided by incoming economic data, suggesting a cautious stance that will depend on the evolving economic landscape.
Daily digest market movers: US Dollar flat as Fed bets adjust, CPI looms
- Fed officials remain cautious, emphasizing the risks of premature easing and indicating further gradual rate cuts may be appropriate.
- The probability of a 50 bps cut in November or December is now zero, and a 25 bps cut next month is only 90% priced in.
- Despite strong economic data, the market still anticipates 125 bps of total easing in the next 12 months.
- Consumer Price Index (CPI) data on Thursday might shake the USD dynamics and the next bets on the Fed.
DXY technical outlook: DXY paused in upward momentum, resistance caps upside
Technical analysis of the DXY index indicates a temporary pause in upward momentum after a recent winning streak. The Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) indicators remain firmly in positive territory, suggesting potential for further gains. While the short-term outlook has improved, the overall bias remains bearish for the USD.
Key support levels rest at 102.30, 102.00 and 101.80, while resistance levels stand at 103.00, 103.50 and 104.00.
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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