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US Dollar sees some losses as markets gear up for FOMC minutes

  • Dollar Index trades at 104.6, registering mild losses in Tuesday’s trading.
  • USD is trading sideways as a cautious Fed is hesitant on premature easing.
  • The odds of a cut in September slightly decrease but remain high.

The US Dollar Index (DXY) is seen at 104.6 level on Tuesday with mild losses. Amid signals of robust growth and persistent inflation in the US, Federal Reserve (Fed) officials continue to express caution about premature easing. The market’s focus is steadily shifting toward the forthcoming release of the Federal Open Markets Committee (FOMC) Minutes on Wednesday and mid-tier data on Thursday and Friday including S&P PMIs and Durable Goods Orders.

As long as the US economy continues its robust growth while enduring inflation, Fed officials will lean toward caution, which could limit the downside for the USD.

Daily digest market movers: DXY mildly down as markets await FOMC Minutes

  • Fed officials express concerns over rushing into easing amidst relaxed financial conditions and continuously advocate for a cautious approach toward rate cuts.
  • Market predictions currently suggest a 75% chance of a rate decrease during the Fed’s September meeting, odds that are mildly lower after being priced in last week.
  • Any fresh clues on the May FOMC Meeting Minutes or the outcome of May’s S&P PMIs or April Durable Goods orders might generate volatility in the USD dynamics.

DXY technical analysis: DXY’s balance between bulls and bears persists, while investors await direction

The indicators on the daily chart reflect a state of equilibrium for the US Dollar Index. The Relative Strength Index (RSI) remains flat, indicating no clear dominance between buying and selling momentum. However, It remains in negative territory, which could suggest an overall bearish bias, but not decidedly so. The Moving Average Convergence Divergence (MACD) shows flat red bars, hinting at bearish sentiment remaining steady.

Despite the increased selling pressure pushing the pair below the 20-day Simple Moving Average (SMA), it continues to stay above the 100 and 200-day SMAs. While the market appears to await direction, the ability of the Index to maintain above the 100 and 200-day SMAs shows persistent demand each time the DXY dips, highlighting a bigger bullish picture.

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.