- The US Dollar is recovering after last Friday’s gains.
- Inflation data takes center stage, CPI is expected to show moderation.
- Expectations for Fed easing have stabilized with the market pricing in less aggressive cuts.
The US Dollar Index (DXY), a measure of the US Dollar against a basket of six currencies, extended its rally on Monday ahead of key inflation data releases this week. Following mixed labor market figures reported last Friday, attention turns to upcoming inflation data, with Consumer Price Index (CPI) figures expected to show moderation. Technical analysis indicates the potential for further gains for the US Dollar in the near term.
Despite positive growth indicators, the US economy faces potential risks. Although the economy remains strong, the market may be too optimistic in pricing in future interest rate cuts.
Market Movers: US Dollar Continues to Recover as Market Digests Mixed NFP
- The US Dollar continues to gain ground after last Friday’s dovish Fed comments and weaker-than-expected jobs data initially triggered a sell-off.
- The Dollar has shown a strong recovery and has registered bullish engulfing patterns against all major currencies except JPY and CHF.
- August CPI data will be released on Wednesday, with headline inflation expected at 2.6% year-on-year versus 2.9% in July. Core inflation is expected to remain stable at 3.2% year-on-year.
- PPI data is due out on Thursday, with headline inflation expected at 1.7% year-on-year versus 2.2% in July.
- Expectations for Fed easing have stabilized with the odds of a 50 basis point cut this month falling to 20-25%. The market continues to price in 100-125 basis point Fed easing by year-end.
- There are no Fed speakers scheduled until Chairman Powell’s press conference on September 18.
DXY Technical Outlook: DXY is looking for resistance at 101.60
The indicators show some momentum but remain negative, struggling to reclaim the 20-day simple moving average (SMA) of 101.60. A break above this level signals a buying opportunity and improves the near-term outlook.
Support levels exist at 101.30, 101.15 and 101.00. Resistance lies at 101.80, 102.00 and 102.30.
US Dollar FAQs
The United States 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 in circulation alongside local banknotes. As of 2022, it is the most traded currency in the world, accounting for over 88% of all global foreign exchange transactions, equivalent to an average of $6.6 trillion in daily transactions. Following World War II, the USD took over from the British Pound as the world’s reserve currency.
The single most important factor influencing the value of the US dollar is monetary policy, which is determined by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and to promote full employment. Its main tool for achieving these two goals is to adjust interest rates. When prices rise too quickly and inflation exceeds the Fed’s 2% target, the Fed raises rates, which helps the dollar. When inflation falls below 2% or the unemployment rate is too high, the Fed can lower interest rates, which weighs on the dollar.
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 jammed financial system. It is an unconventional policy measure used when credit has dried up because banks are not lending to each other (for 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 of 2008. It involves the Fed printing more dollars and using them to buy US government bonds, primarily from financial institutions. QE typically leads to a weakening of the 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 of maturing securities in new purchases. It is generally positive for the US dollar.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
