- DXY retreats to 100.80 after Retail Sales, PPI and jobless claims show limited surprises.
- Fed’s Powell signals potential changes to long-term framework, maintaining cautious inflation stance.
- Currency markets watch for volatility amid US-Asia policy talks and geopolitical tensions.
- Market pricing tilts toward rate cuts by September as inflation pressures ease.
The US Dollar Index (DXY), which tracks the Greenback against a basket of major currencies, is trading just under 101.00 on Thursday after key US economic data releases offered little upside momentum. Retail Sales rose a modest 0.1% in April, while the Producer Price Index softened to 2.4% annually, below expectations. Weekly jobless claims held steady at 229K.
Speaking at the Thomas Laubach Research Conference, Federal Reserve (Fed) Chair Jerome Powell reiterated the need to revisit the Fed’s strategic language around inflation and employment. The market reaction was muted, with traders shifting focus toward possible currency interventions in Asia and the deteriorating tone in Russia-Ukraine negotiations.
Daily digest market movers: Going nowhere
- US Retail Sales rose by 0.1% in April, beating expectations of flat growth, but failed to shift market sentiment.
- Producer Price Index came in softer at 2.4% year-over-year, with core PPI slowing to 3.1%, supporting a dovish policy lean.
- Jobless claims held steady at 229K, showing no signs of new labor market stress, while continuing claims rose modestly.
- Fed Chair Powell flagged upcoming changes to Fed communications and emphasized the need to handle future supply shocks better.
- Markets are digesting Powell’s comment that April PCE is likely around 2.2%, with inflation overshoots no longer relevant.
- Traders closely monitor South Korea and Asian FX volatility amid rumors of potential US-led efforts to weaken the Greenback.
- Currency market caution persists as Russia-Ukraine talks stall and US President Trump pushes for a high-level meeting with Putin.
- DXY lacks traction despite Powell’s remarks, slipping to 100.80 and reversing Wednesday’s bounce.
- Market pricing reflects rising expectations for a Fed rate cut by September, narrowing yield spreads and dampening USD demand.
- The overall tone remains indecisive, with DXY range-bound and geopolitical headlines clouding direction.
US Dollar Index Technical Analysis: Stuck between two forces
The US Dollar Index (DXY) shows indecisiveness as it trades around 101.00, reversing modest gains from the prior session. Price action is confined within a tight band between 100.59 and 101.05. The Relative Strength Index (RSI) hovers in the 50s, and the Moving Average Convergence Divergence (MACD) indicates mild buy momentum, though Momentum (10) reads around 1.0, reflecting limited upward pressure. The Stochastic RSI Fast in the 70s and Awesome Oscillator near 0 suggest a neutral to slightly bullish bias. However, the broader outlook remains bearish, with the 100-day and 200-day SMAs and several EMAs in the 100s signaling selling pressure. Immediate support lies at 100.62, 100.59, and 100.56, while resistance is seen at 100.92, 101.34, and 101.81. A clear breakout above 101.90 or a drop below 100.22 could define the next directional move.
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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