US Dollar expands gains after Beige Book report
- A sharp recovery in US Dollar triggered by cautious market sentiment.
- Bets for interest rate cut at the September Fed meeting continue to receive pressure from Fed officials.
- US Treasury yields also fuel recovery in USD with 2-year yield rising to 5.00%.
The US Dollar Index (DXY) is showing a sharp recovery, hovering around the 105.00 mark on Wednesday. Amid this climate, investors remain risk-averse. As Federal Reserve (Fed) officials’ continuous asking for patience has resulted in reduced bets on a rate cut for the upcoming September Federal Open Market Committee (FOMC) session. As a reaction, US Treasury yields recovered.
As the US economy remains strong, the likelihood of cuts in June and July remains low, with markets keenly looking forward to data that would aid in placing bets for the September meeting.
Daily digest market movers: DXY recovers as markets await drivers
- Investor expectations see a rate cut to start in the last quarter of the year.
- The Fed Beige book report from April to mid-May showed that national economic activity saw slight growth, with mixed conditions across industries and districts; retail and auto sales were flat, but travel and tourism strengthened.
- The report also stated that employment rose slightly, wage growth was moderate, and prices increased modestly as consumers resisted further price hikes.
- In addition, housing demand rose modestly, commercial real estate softened, and overall economic outlooks became more pessimistic amid rising uncertainty.
- US Treasury yields soared and the 2-year yield rose to 5%, while the 5 and 10-year rates gained to 4.63% and 4.62%, respectively.
DXY technical analysis: US Dollar makes remarkable recovery, bulls aim to consolidate above 105.00
The daily chart indicators signify a recovery in the DXY. The Relative Strength Index (RSI) rose above the 50 level, indicating reduced selling pressure and a potential shift in momentum. To further establish bullish momentum, the DXY managed to regain territory above the 20-day Simple Moving Average (SMA).
The Moving Average Convergence Divergence (MACD) displays fading red bars, suggesting a potential end of the bearish trend and an onset of bullish sentiment. For the bulls to continue gaining ground, consolidation above 105.00 would be required.
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.
