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US Dollar gains cleared out post PCE data

  • US Dollar saw a slight dip at the end of the week, clearing daily gains.
  • US Dollar finds support amid high US Treasury yields.
  • May’s PCE data showed an unexpected deceleration in US inflation.

The end of the week saw the US Dollar, as benchmarked by the DXY Index, settle near 105.80, after hitting a high of 106.13 earlier in the session. This follows the release of Personal Consumption Expenditures (PCE) data, but the losses are limited by the high US Treasury yields.

The American economy remains resilient with slight inflationary signals, which is just enough to keep the Federal Reserve (Fed) from completely embracing the easing cycle.

Daily digest market movers: US Dollar dips on weak PCE data

  • On Friday, May’s Personal Consumption Expenditures (PCE) showed headline inflation soften to 2.6% YoY, down from the previous month’s 2.7%.
  • Core PCE (which excludes volatile food and energy prices) has also experienced a decline to 2.6% from the previous 2.8% in April.
  • US Treasury yields provide resilience to the Dollar, with the 2, 5 and 10-year rates at 4.71%, 4.32%, and 4.33%, respectively.
  • Probability of a Fed rate cut in September marginally increased to 66%, up from the pre-release expectation of 64% as per CME Fedwatch Tool.
  • Focus will now shift to labor market data from June.

DXY technical outlook: Positive momentum persists, index eyeing higher grounds

Despite the recent data fluctuations, the technical outlook remains positive, with indicators in green but losing some steam. The Relative Strength Index (RSI) continues to be above 50 but appears to point downward, indicating a slight pause in the bullish momentum. The green bars are still developing in the Moving Average Convergence Divergence (MACD), further facilitating the positive view but at a slower pace.

The DXY Index holds above the 20, 100 and 200-day Simple Moving Averages (SMAs), confirming its ongoing positive stance. Despite the Index’s steadiness at the highs seen since mid-May, there is room for further rise, suggesting the DXY is poised for further upside with the 106.50 zone next in sight. Conversely, 105.50 and 105.00 will be areas to observe in case of a drawdown.

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.