US Dollar looks to be on holiday, with no clear direction at hand

US Dollar looks to be on holiday, with no clear direction at hand

  • The US Dollar turns flat this week and trades relatively steady at current levels. 
  • Traders will feast on no less than four Fed speakers on Wednesday. 
  • The US Dollar index hovers around 105.00 and is looking for direction.

The US Dollar (USD) trades sideways and is stuck in a tight range in most currency pairs on Wednesday. As such, that should not come as a surprise as the semi-annual testimony from US Federal Reserve (Fed) Chairman Jerome Powell before Congress on Tuesday did not bear any special comments or new angles that markets have not priced in yet. It could have been a tape recorder replaying the latest Fed rate decision, with the bottom line remaining the same: Powell wants to keep rates steady for longer as he is afraid to start cutting too soon. 

On the economic front, no real data springs out, though it will instead be the side events that will draw up all the attention. With a 10-year Note auction, it is an ideal moment to see how the benchmark tenor will be behaving and how the appetite for American debt is now in the bond market. Add in there no less than three Fed members, besides Fed Chairman Powell, who is heading to Congress again this Wednesday, and it looks to be a rather Fed-driven day. 

Daily digest market movers: Summer breeze

  • At 11:00 GMT, the weekly Mortgage Applications data for the week ending on July 5 has been released by the Mortgage Bankers Association (MBA). Last week, a slight decrease of 2.6% was noted, with another decline by 0.2% for this week.
  • May’s Wholesale Inventories data will come out at 16:00 GMT. Expectations are for a steady 0.6%.
  • At 17:00 GMT, the US Treasury will allocate a 10-year Note in the market.
  • Several Fed speakers are lined up on Wednesday:
    • At 14:00 GMT, Federal Reserve Chair Jerome Powell testifies before Congress, providing a broad overview of the economy and monetary policy. 
    • Federal Reserve Governor Michelle Bowman and Federal Reserve Bank of Chicago President Austan Goolsbee will give the opening remarks at the Fed Listens in Chicago, United States, at 18:30 GMT.
    • Federal Reserve Governor Lisa Cook delivers a speech titled ‘Global Inflation and Monetary Policy Challenges’ at the 2024 Australian Conference of Economists in Adelaide, Australia, at 22:30 GMT.
  • Equity markets are a bit mixed, looking for direction with no real outliers in the European session. 
  • The CME Fedwatch Tool is broadly backing a rate cut in September despite recent comments from Fed officials. The odds now stand at 70.0% for a 25-basis-point cut. A rate pause stands at a 26.7% chance, while a 50-basis-point rate cut has a slim 3.3% possibility. 
  • The US 10-year benchmark rate trades at 4.28%, near its weekly low. 

US Dollar Index Technical Analysis: Same story, different day

The US Dollar Index (DXY) is yet again looking for direction with no substantial moves, even after Fed Chairman Powell’s comments on Tuesday. Fatigue is creeping into the Dollar, with markets looking for any different message Powell might deliver. The continuous message that interest rates should remain steady, that they are data-dependent, and that cutting borrowing costs too early might be counterproductive is starting to push investors out of the Greenback. 

On the upside, the 55-day Simple Moving Average (SMA) at 105.16 remains the first resistance. Should that level be reclaimed again, 105.53 and 105.89 are the following nearby pivotal levels. The red descending trend line in the chart below at around 106.23 and April’s peak at 106.52 could come into play should the Greenback rally substantially. 

On the downside, the risk of a nosedive move is increasing, with only the double support at 104.80, which is the confluence of the 100-day SMA and the green ascending trend line from December 2023, still in place. Should that double layer give way, the 200-day SMA at 104.41 is the gatekeeper that should catch the DXY and avoid further declines. Further down, the correction could head to 104.00 as an initial stage. 

US Dollar Index: Daily Chart

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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