The US dollar is steady with traders sitting on their hands until the Fed decision

Vaseline4 weeks ago

0 5 minutes read

The US dollar is steady with traders sitting on their hands until the Fed decision

The US dollar is trading flat against most major currencies on Tuesday.
Traders await the Fed’s decision on Wednesday, with limited reaction expected from retail sales data.
The US dollar index is under selling pressure near annual lows ahead of the key central bank event.

The US dollar (USD) is trading on Tuesday and traders are sitting on their hands ahead of Wednesday’s main event. The Federal Open Market Committee (FOMC) meets on Tuesday to debate the US Federal Reserve’s (Fed) upcoming policy decision on Wednesday and how big the Fed’s initial interest rate cut will be. Then the markets will finally hear from Fed Chairman Jerome Powell at the press conference.

As for economic data, retail sales will be held on Tuesday. Although normally a big market mover, expect the reaction to be somewhat subdued as traders await the outcome of the Fed meeting before entering a trade. The only scenario in which a substantial move could happen is if retail sales contracted in August, which would support the case for the Fed to offer a larger 0.50% rate cut.

Daily Market Reasons: Retail Sales Don’t Make Waves

Retail sales data for August is due at 12:30 GMT. Monthly retail sales are expected to rise 0.2 percent after rising 1.0 percent in July. Sales, excluding cars and transport, are expected to move marginally 0.3% from 0.4% the previous month.
At 13:15 GMT, industrial production data for August is expected to settle at 0.0%, from a contraction of 0.6% in July.
At 14:00 GMT, Federal Reserve Bank of Dallas President Lorie Logan will deliver welcome remarks at the 11th Dallas District Banking Conference. Logan is not expected to speak on monetary policy as the Fed is in the deadlock period ahead of Wednesday’s meeting.
At the same time at 14:00 GMT, the National Association of Home Builders (NAHB) will release its September Housing Market Index, with a steady level of 40 expected from the previous reading of 39.
Japanese stocks started their week after the holiday on Monday. Both the Topix and Nikkei fell more than 0.50%. European and US stocks are looking the other way and heading for the green.
The CME Fedwatch tool shows a further chance of a 25 basis point (bps) interest rate cut by the Fed on Wednesday at just 33.0%, down from 66% seen a week ago. Meanwhile, markets raised the odds of a 50 basis point cut to 67.0%. For the November 7 meeting, another 25 bps cut (if September is a 25 bps cut) is expected at 18.0%, while there is a 52.3% chance that rates will be 75 bps (25 bps + 50 bps) and a 29.7% probability of rates being 100 (25 bps + 75 bps) basis points lower than current levels.
The benchmark US 10-year yield is trading at 3.61%, nearing a 15-month low of 3.60%.

Economic indicator

Retail Sales (MoM)

Retail sales data, published monthly by the US Census Bureau, measure the value of total receipts by retail and grocery stores in the United States. Monthly percentage changes reflect the rate of change in such sales. A stratified random sampling method is used to select approximately 4,800 retail and foodservice firms whose sales are then weighted and compared to represent the full universe of more than three million retail and foodservice firms nationwide. The data is adjusted for seasonal variations, as well as differences in holidays and trading days, but not for price changes. Retail sales data is widely watched as an indicator of consumer spending, which is a major driver of the US economy. Generally, a high reading is seen as bullish for the US dollar (USD), while a low reading is seen as bearish.

US Dollar Index Technical Analysis: Limited Again

The US dollar index (DXY) is trading within the limits it has traded in over the past month, near annual lows. A very small bounce is visible on the chart, although it doesn’t really run away from that lower band. The risk is that the DXY could collapse under it when the Fed cuts its interest rate.

The recent range high is 101.90. Above, a steep 1.2% rally would be needed to bring the index to 103.18, with the 55-day simple moving average (SMA) at 102.89. The next upside leg is very cloudy, with the 200-day SMA at 103.81 and the 100-day SMA at 103.88, just ahead of the high round of 104.00.

On the downside, 100.62 (Dec 28, 2023 low) is holding strong and has already retraced the DXY twice in recent weeks. Should it break, the July 14, 2023 low at 99.58 will be the next level to watch. If this level breaks, early 2023 levels approach 97.73.

US Dollar Index: Daily Chart

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 preferred weapon to combat the credit crunch that occurred during the Great Financial Crisis of 2008. This 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.

Vaseline4 weeks ago

0 5 minutes read