US Dollar rebounds near yearly highs on quiet session
- Greenback extends its rebound to near 106.70.
- Fed’s hawkish stance, risk-off sentiment support Greenback demand.
- Fed officials emphasize caution in rate cuts due to economic data, inflation risks.
The US Dollar Index (DXY), which measures the value of the USD against a basket of currencies, has traded with solid gains, rising to 106.70. The DXY's upward trajectory is driven by factors such as recent strong economic data, rising yields, and a less dovish stance from the Federal Reserve (Fed).
Factors driving its strength include geopolitical tensions, cautious Fed rhetoric on interest rates, and solid US economic data. The uptrend remains intact, supported by the economy's resilience and limited expectations of aggressive Fed easing. That being said, after the index reached yearly highs around 107.00, a pullback or a period of consolidation is possible.
Daily digest market movers: US Dollar advances as markets adjust bets on Fed cuts
- The DXY's rise is driven by favorable data, rising yields, and the market's cooling dovish Fed bets.
- Last week, Powell downplayed the need for aggressive easing, emphasizing the economy's strength. He suggested slowing the pace of rate cuts to increase chances of achieving the right balance
- Other Fed officials align with Powell's cautious approach, highlighting the need to consider both inflation and employment.
- Market odds of a December rate cut have fallen toward 58%, according to the CME FedWatch Tool, indicating a shift in expectations.
- For the rest of the week, markets will look upon weekly Initial Jobless Claims data, as well as S&P PMIs figures on Friday.
DXY technical outlook: Bulls resume momentum near overbought terrain
The US Dollar Index continues its bullish momentum on Wednesday, supported by positive technical indicators. The Relative Strength Index (RSI) is nearing overbought territory, indicating potential consolidation. However, the Moving Average Convergence Divergence (MACD) remains bullish, suggesting the uptrend could extend.
The index faces resistance at 107.00, with a key support zone between 106.00 and 105.00.
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.
Author
Patricio Martín
FXStreet
Patricio is an economist from Argentina passionate about global finance and understanding the daily movements of the markets.
