- Despite market concerns, the US economy continues to grow above trend.
- The market anticipates 100 bps of Fed easing by year’s end.
- Wednesday won’t have any economic highlights, market sentiment to dictate the pace.
The US Dollar, measured by the DXY index, remained well-supported during Wednesday’s session, driven primarily by selling pressure on the Japanese Yen following a cautious outlook by the Bank of Japan. The USD/JPY pair saw a significant 2% surge throughout the day, contributing to the DXY index’s hold above the 103.00 point. While there won’t be any economic data highlights on Wednesday, caution and risk perception might dictate the pace of the USD.
While markets contended with potential implications of further easing from the Fed, the US economy continues to perform solidly. Growth remains above trend, suggesting a market caught up in overly aggressive easing forecasts.
Daily digest market movers: US economic performance calls into question market’s aggressive easing bets
- The market remains mispriced on the extent of the Fed’s easing, still fully pricing in 100 bps by year-end, a decrease from Monday’s 125 bps expectations.
- The market now anticipates a near 80% likelihood of a 50 bps reduction in September, down from Monday’s 90%
- Overall easing over the next 12 months is now expected between 175 to 200 bps, a reduction from the over 200 bps predicted on Monday
On the other hand, a severe US economic recession would need to materialize for the current easing path to remain feasible. Until more data is available, it remains challenging to counteract the prevailing dovish market narrative.
DXY technical outlook: Indications of improvement seen, bears take a breather
The DXY index’s technical outlook is improving. Both the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) are currently in the red, with the RSI below the 50-point level but pointing upwards, and the MACD continuing to print lower red bars.
However, a firmly bearish outlook is confirmed by the index remaining below the 20, 100 and 200-day Simple Moving Averages (SMAs).
With this in mind, current support stands at 103.00, 102.50 and 102.20 with resistance noted at 103.50 and 104.00.
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.
