US Dollar stretches higher ahead of Michigan numbers

  • The US Dollar trades higher and overpowers other currencies such as the Japanese Yen and the Euro weaken. 
  • The BoJ said it is set to ease its bond-buying program in a very slow grind, while European sovereign bond yields increase due to political uncertainty in France.. 
  • The US Dollar index trades above 105.50 and could head towards year-to-date highs.

The US Dollar (USD) cuts through markets on Friday as traders flee out of the Japanese Yen (JPY) and the Euro (EUR). The renewed strength in the Greenback comes as sovereign bond yields in some countries in the Eurozone, particularly France, are spiking on the back of political uncertainty. In Asia, the weaker Japanese Yen is the result of the Bank of Japan (BoJ) monetary policy meeting, which concluded with Governor Kazuo Ueda’s announcement that the bank is set to relax its bond-buying program. 

On the economic data front, markets seem to be ignoring the recent soft inflation figures and focusing on a still hawkish Federal Reserve (Fed). On Friday, the calendar offers import-export data price data and the University of Michigan Consumer Sentiment and Inflation Expectations survey. Federal Reserve Bank of Chicago President Austan Goolsbee and Federal Reserve Governor Lisa Cook will drop some comments during the US session. 

Daily digest market movers: Disinflation is being ignored

  • Two non-USD drivers triggered ample US Dollar strength across the board on Friday:the Eurozone bond crunch – with sovereign yields rising in countries like Italy and France – and the outcome of the Bank of Japan monetary policy meeting. 
  • The USD/JPY pair climbs back to nearly 158.00 after the BoJ announced it will ease its bond-buying program. This might trigger a freefall in bond prices and a rise in yields, triggering further Yen weakness. 
  • At 12:30 GMT, US Import and Export prices for May got released. Monthly Import prices dropped from 0.9% to -0.4%. Monthly Export prices dropped from 0.6% to -0.6%. 
  • At 14:00 GMT, the University of Michigan will release its preliminary report for June:
    • Consumer Sentiment is expected to jump back to 72.0 from 69.1.
    • The five-year inflation expectations rate stood at 3% at the end of April. 
  • Near 18:00 GMT, Federal Reserve Bank of Chicago President Austan Goolsbee participates in a fireside chat at the Iowa Farm Bureau Economic Summit.
  • At 23:00 GMT, Federal Reserve Governor Lisa Cook delivers a speech at the 50 Years celebration of the American Economic Association Summer Program in Washington D.C.
  • Equity markets are painting a not bright picture for this Friday with red numbers across the board in Europe and US. 
  • The CME FedWatch Tool shows a 31.5% chance of Fed interest rate remaining at the current level in September. Odds for a 25-basis-points rate cut stand at 60.5%, while a very slim 7.9% chance is priced in for a 50-basis-points rate cut.
  • The benchmark 10-year US Treasury Note slides to the lowest level for this month, near 4.22%, flirting with the lows seen in March. 

US Dollar Index Technical Analysis: Fresh high

The US Dollar Index (DXY) is getting help from both the Japanese Yen and the Euro this Friday. With both currencies accounting for nearly 70% of the basket forming the US Dollar Index, when both weaken, the Greenback gains without doing anything. With still a few weeks to go before the French elections and the BoJ taking it very slowly, the Greenback could get some further support in the coming weeks. 

On the upside, no big changes to the levels traders need to watch out for. The first is 105.52 where the DXY is trading around at this moment, a level that held during most of April. The next level to watch is 105.88, which triggered a rejection at the start of May and will likely play its role as resistance again. Further up, the biggest challenge remains at 106.51, the year-to-date high from April 16. 

On the downside, the trifecta of Simple Moving Averages (SMA) is still playing support. First is the 55-day SMA at 105.07. A touch lower, near 104.48, both the 100-day and the 200-day SMA are forming a double layer of protection to support any declines. Should this area be broken, look for 104.00 to salvage the situation. 

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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