The US dollar recovers as selling pressure eases

VaselineAugust 26, 2024

0 3 minutes read

The US dollar recovers as selling pressure eases

The US dollar is recovering after falling on Friday on dovish remarks from Powell.
Markets expect 100 bps of easing by the end of the year and 200 bps in total over the next 12 months.
The focus is on PCE data later this week.

The US dollar, as measured by the US Dollar Index (DXY), regained some ground on Monday, hovering around 101.00 after falling last week. Friday’s decline was attributed to dovish remarks by Federal Reserve (Fed) Chairman Jerome Powell at the Jackson Hole Symposium, hinting at a potential shift by the central bank toward looser monetary policy. This, in turn, caused the US 10-year yield to fall below 3.8%, which weighed heavily on the USD.

Despite positive economic growth exceeding expectations, the market’s desire for aggressive monetary easing appears misplaced. The current situation calls for caution, as all the data points to a disconnect between economic fundamentals and market prices.

Daily Market Motifs: The US dollar remains vulnerable following Powell’s dovish remarks

Markets are digesting Powell’s upbeat speech from Jackson Hole, expecting to relax.
Powell signaled a shift in Fed policy, saying “the time has come for policy to adjust.”
He also stressed the importance of the labor market, noting an “unmistakable” slowdown.
100 bps of easing is expected by the end of the year, with a total of 200 bps over the next 12 months.
Chances of a 50 bps cut in September are 30-35%, depending on future data.
Market participants await the August NFP report for further guidance on the Fed’s path.
Friday July’s personal consumption expenditure (PCE) will be key.

DXY Technical Outlook: DXY finds support, bullish momentum could develop

The DXY found support at its lowest levels since December, indicating a temporary pause in selling pressure. The Relative Strength Index (RSI) remains deeply oversold, suggesting the potential for corrective moves to the upside.

The Moving Average Convergence Divergence (MACD) shows steady red bars, aligning with the RSI and providing further evidence of potential upside momentum as there is more room to correct. That said, there are no clear signs of a reversal, and DXY is exposed to several downsides.

Key support levels to monitor are 100.50, 100.30 and 100.00, while resistance levels to watch are 101.00, 101.50 and 101.80.

US Dollar FAQ

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 banknotes. It is the world’s most heavily traded currency, accounting for more than 88% of total global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, as of 2022. After World War II world, the USD has taken 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 disappeared.

The most important factor influencing the value of the US dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to ensure price stability (inflation control) and to promote full employment. Its main tool for achieving these two objectives is the adjustment of interest rates. When prices rise too fast and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the value of the USD. When inflation falls below 2% or the unemployment rate is too high, the Fed can lower interest rates, which weighs on interest rates.

In extreme situations, the Federal Reserve can also print more dollars and engage in 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 (for fear of default). It is a last resort when simply lowering interest rates is unlikely to achieve the desired result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis of 2008. It involves the Fed printing more dollars and using them to buy US government bonds mainly 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 of maturing bonds it holds in new purchases. It is usually positive for the US dollar.

VaselineAugust 26, 2024

0 3 minutes read

Daily Market Motifs: The US dollar remains vulnerable following Powell’s dovish remarks

DXY Technical Outlook: DXY finds support, bullish momentum could develop

US Dollar FAQ

Vaseline

Related Articles

Crypto ETFs post net inflows of $436M as hope of 50bp rate cut resurfaces

Chesapeake Granite Wash Trust (CHKR) will issue a $0.02 dividend on August 29th

Super Micro’s shares sink despite rising revenue and stock split. Should Investors Buy Declining Stocks?

Climate change, extreme weather bring challenges to France’s Chablis Wine Country