US Dollar takes the foot off the gas ahead of key inflation figures
- The US Dollar Index softens towards 107.00.
- Profit-taking after steep rallies in November pressured Greenback lower.
- Expectations for a lower U.S. corporate tax rate and a wave of deregulation should boost foreign portfolio and FDI flows to the US.
The US Dollar Index (DXY) retreated from its fresh two-year high on Friday, softening towards 107.00. The US calendar won’t feature any major highlights on Monday’s session.
The US Dollar Index (DXY) remains bullish despite a recent pullback from a two-year high. Strong economic data and a less dovish Federal Reserve stance support the index's upward trajectory. In addition, geopolitical jitters from the Russian-Ukraine war has contributed to the upside.
Daily digest market movers: US Dollar firm despite pullback, Trump’s policies might favor the upside
- The robust U.S. economy is outperforming other advanced economies.
- Trump's proposed policies will likely prolong Fed's restrictive policy and the US is anticipated to see increased foreign investment due to potential tax cuts and deregulation.
- Higher real interest rates are predicted due to the U.S.'s favorable productivity landscape.
- For the rest of the week, investors will eye Gross Domestic Product (GDP) and Personal Consumption Expenditures (PCE) figures to be released on Thursday and Friday as they might shake the USD’s ground.
- Jobless Claims on Thursday will also be important.
DXY technical outlook: Index consolidates after retreat from highs, bullish bias intact
Technical indicators suggest a possible consolidation period due to overbought conditions, with the Relative Strength Index (RSI) easing from overbought levels and the Moving Average Convergence Divergence (MACD) histogram contracting. Despite the consolidation, the overall bullish trend remains intact, with resistance at 108.00 and support at 106.00-106.50 area. Bulls must hold this area to maintain the bullish momentum.
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.