US Dollar pops higher as markets digest hawkish Fed comments
- The US Dollar trades firmly in the green against nearly all major peers.
- A light data calendar is ahead as markets digest hawkish Fed comments.
- The US Dollar index flirts with a retest of 105.90.
The US Dollar (USD) trades stronger on Wednesday for the second day in a row with some help from US Federal Reserve (Fed) officials, who seem to have turned more hawkish. Federal Reserve Governor Michelle Bowman lit the fire on the fuzz by saying that a rate hike is still an option while she sees too many potential risks that could still drive inflation higher. Her thesis became reality just a few hours later, after neighbouring country Canada released red-hot inflation numbers.
On the economic front, a rather light calendar ahead of Thursday’s Gross Domestic Product (GDP) final estimate and Friday’s Personal Consumption Expenditures (PCE) Price Index release. Still, traders will need to watch out for the Bank Stress Test report, to be published at 20:30 GMT, in which the Fed analyzes how healthy US banks’ balance sheets are in case of financial market distress.
Daily digest market movers: Fed scaring markets
- Markets got spooked by comments from Federal Reserve Governor Michelle Bowman on Tuesday, saying she is “willing to raise the target rate at a future meeting if inflation progress stalls or reverses”, while she “expects US inflation to remain elevated for some time, still seeing a number of upside inflation risks.”
- At 11:00 GMT, the weekly Mortgage Applications Index from the Mortgage Bankers Association (MBA) will release this week’s numbers. The index rose 0.9% the previous week.
- At 14:00 GMT, New Home Sales data for May is due to come out. Analysts expect sales to increase slightly to 640,000 from April’s 634,000.
- The US Treasury is heading to markets to allot a 5-year Note in the markets at 17:00 GMT.
- The Fed’s Bank Stress Test report will come out near 20:30 GMT.
- Equities are recovering after Nvidia (NVDA) was able to eke out gains on Tuesday at the US closing bell. The main indices in Asia are all in the green and even the Dax and the pan-European index, Euro Stoxx 50, is recovering. US futures are rather mixed, with the Dow Jones Industrial futures in the red against Nasdaq futures in the green and the S&P 500 caught in the middle.
- The CME Fedwatch Tool is broadly backing a rate cut in September despite the recent comments from Fed officials, with odds now standing at 59.5% for a 25 basis point cut. A rate pause stands at a 34.1% chance, while a 50-basis-point rate cut has a slim 6.4% possibility.
- The US 10-year benchmark rate trades at 4.26%, and trades near the high for this week.
US Dollar Index Technical Analysis: Stuck in a rut
The US Dollar Index (DXY) is rolling for a second day in a row, though it looks to be sticking to a sideways trend for now. The Greenback seems to be broadly consolidating, with no new highs and no new lows in over five trading days. However, key economic data to be released on Thursday and Friday might move the needle.
On the upside, the first level to watch is 105.88, which triggered a rejection at the start of May and on Friday last week. Further up, the biggest challenge remains at 106.52, the year-to-date high from April 16. A rally to 107.20, a level not seen since April 2023, would need to be driven by a surprise uptick in US inflation or a sudden hawkish shift from the Fed.
On the downside, 105.52 is the first support ahead of a trifecta of Simple Moving Averages (SMA). First is the 55-day SMA at 105.23, safeguarding the 105.00 round figure. A touch lower, near 104.66 and 104.48, both the 100-day and the 200-day SMA form a double layer of protection to support any declines. Should this area be broken, look for 104.00 to salvage the situation.
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.