US Dollar rebounds and cuts some daily losses, outlook still negative
- US Dollar DXY finds some footing closer to 104.00 as sellers seem to take a breather.
- Federal Reserve officials continue to maintain a cautious stance, with a rate cut expected in September.
- Concerns over the US labor market might weigh on the USD.
On Thursday, the US Dollar measured by the DXY index experienced a rebound, closing in on the 104.00 mark, despite concerns over the labor market. The rise came about as sellers appeared to hit the pause button. Market anticipations of a rate cut in September by the Federal Reserve and the frailty in the US labor market will be key topics to follow as they might put additional pressure on the currency.
The US economic outlook shows indications of disinflation, with financial markets expressing confidence in a rate cut in September. Despite this, Federal Reserve officials display reluctance to rush into interest rate cuts and still adhere to a data-dependent approach.
Daily digest market movers: DXY rebound, rising jobless claims raise alarms about the US labor market health
- Data from the US Department of Labor indicated a surge in Jobless Claims for the week ended July 13 by 243K, surpassing initial predictions of 230K, and worse than the prior gain of 223K (revised from 239K).
- On a positive note, the Philadelphia Fed Manufacturing Survey for July recorded a markedly greater improvement than expected, hitting 13.9 after recording 1.3 in June.
- Following the data, dovish bets on the Fed remain steady.
- According to the CME FedWatch Tool, a rate cut in September seems to be priced and limits the upside for the USD.
- If data continues to come in weak, markets might consider a cut in the upcoming July meeting.
DXY Technical Outlook: Bearish outlook continues slight recovery to the upside seems probable
The DXY managed a rebound near the vicinity of the 104.00 area but the outlook remains bearish with the index below the 20,100 and 200-day Simple Moving Average (SMA). With daily technical indicators, like the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD), still languishing below 50, it indicates the weight of the bearish outlook has not subsided. However, the DXY index may see a minor correction to the upside in the forthcoming sessions.
The strong support levels remain at 103.50 and 103.00. However, the overall technical outlook continues to favor the bears.
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.