- The US Dollar strengthens post-FOMC decision with market participants setting their sights on Friday's Nonfarm Payrolls data.
- In spite of signs of disinflation, the US economic landscape remains strong, prompting the Fed to maintain a data-dependent stance.
- Chair Powell commented that the bank will cut in case data continues showing progress.
On Thursday, the US Dollar, as assessed by the DXY index, saw a rebound following the Federal Reserve’s (Fed) session on Wednesday. Despite the increased chances for a cut in September, the solid status of the US economy led to demands for more data by Chair Jerome Powell before proceeding with the cut, which slightly reduced the odds of a cut in September though they still remain high.
The initial signs of disinflation are beginning to surface in the US economic outlook, further strengthening the market's expectations for a September rate cut. Nevertheless, the broader economy is still exhibiting robustness as supported mainly by economic activity indicators.
Daily digest market movers: US Dollar recovers as markets asses fresh data
- On Thursday, data showed that the US manufacturing sector showed continued contraction with a mounting pace in July, as indicated by the ISM Manufacturing PMI dropping to 46.8 from June's 48.5.
- This fell below market expectations of 48.8. Also, the Employment Index of the PMI survey witnessed a sharp decline to 43.4 from June's 49.3.1.
- The New Orders Index also fell to 47.4 from 49.3. However, the Prices Paid Index, which measures inflation, saw a slight increase to 52.9 from June's 52.1.
- Moreover, US citizens applying for unemployment benefits saw a rise of 249K in the week ending July 27, according to the US Department of Labor (DoL) on Thursday. These readings surpassed the initial market consensus of 236K, and were higher than last week's gain of 235K.
- Key Nonfarm Payrolls data will be released on Friday, which will ultimately determine the market's position in relation to the Fed's decision in September.
DXY technical outlook: Index outlook hinges on NFPs on Friday as there is no clear dominant party
Following the Fed decision, the index sprang back above the 20-day SMA and it appears that buyers will labor to keep this level throughout the remaining session. The DXY continues to have support at 104.15 and 104.00, while resistance levels are found at 104.50 and 105.00.
Indicators in the meantime are pointing north with the Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD) showing a growing momentum for the buyers but it is still in a negative zone.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named 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 during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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