US dollar falls to multi-month lows on favorable Fed bets

VaselineAugust 20, 2024

0 3 minutes read

US dollar falls to multi-month lows on favorable Fed bets

The US dollar, as measured by the DXY index, fell to a seven-month low amid falling Treasury yields.
Investors are looking to Powell’s next address in Jackson Hole for further indications of further Fed rate cuts.
A September cut is pretty much a done deal based on interest rate bets.

The US dollar, as measured by the US Dollar Index (DXY), hit a seven-month low, in line with a downward trend in Treasury yields and intense bearish bets on the Federal Reserve (Fed). In response to sentiment surrounding Chairman Jerome Powell’s upcoming remarks at the Jackson Hole meeting starting Thursday, market investors are focusing on potential revelations about future Fed rate cuts.

Despite this development, the US economic outlook remains resilient. Comprehensive analysis of recent data reinforces that the US economy continues to grow above trend. This points to a recurring market narrative leaning towards anticipating aggressive monetary policy easing.

Market Players’ Daily Roundup: DXY Hits Seven-Month Low Ahead of Jackson Hole Symposium

Earlier in the week, the DXY index saw a steady decline, now at seven-month lows against all major global currencies.
The US economy, on the other hand, is showing stability with a benign inflation rate and solid domestic demand.
However, the market is speculating an imminent Fed siphoning, starting in September. However, the misaligned reality of the US economy and a dovish stance by the Fed reveal a potential revival opportunity for the DXY index in the coming trading sessions. Jerome Powell’s words at the Jackson Hole Symposium will be key.
While the odds of a sharp 50 bps cut in September have receded, the market still anticipates nearly 100 bps of total easing by the end of the year.
This also extends to 175-200 bps of easing over the next 12 months.

DXY Technical Analysis: Bearish dominance persists as DXY breaks out of sideways movement

Despite continued efforts by buyers, DXY’s technical outlook has taken on a clearer bearish hue. The DXY index broke out of the sideways trading phase in the range of 102.50-103.30, which is a great probability for sellers. The momentum-oriented Relative Strength Index (RSI) took a major hit, falling into oversold territory, with the Moving Average Convergence Divergence (MACD) showing rising red bars. This strongly suggests entrenched bearish dominance over DXY.

Support levels: 101.50, 101.30, 101.20

Resistance levels: 102.00, 102.50, 103.00

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 affects 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.

VaselineAugust 20, 2024

0 3 minutes read

Market Players’ Daily Roundup: DXY Hits Seven-Month Low Ahead of Jackson Hole Symposium

DXY Technical Analysis: Bearish dominance persists as DXY breaks out of sideways movement

US Dollar FAQ

Vaseline

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