- US Dollar lost ground on lower-than-anticipated Retail Sales figures, which fuel dovish bets on the Fed.
- Markets are digesting comments from Fed officials for placing their bets on the rate cut cycle.
- Investors continue challenging the Fed and bet on more than one cut in 2024.
On Tuesday, the US Dollar, as measured by the DXY Index (DXY), registered a decline, settling at 105.30. This downturn was mainly invoked by markets reacting to recent comments from Federal Reserve (Fed) officials in combination with the less than anticipated Retail Sales data for May.
The US economic outlook is riddled with mixed signals, but signs of disinflation are starting to arise, which may weaken the USD.
Daily digest market movers: DXY under pressure on disappointing Retail Sales figures
- Markets are now processing words from Fed speakers along with the just-released Retail Sales figures for May.
- On the data front, the US Census Bureau reported May’s Retail Sales data growth at a slower pace of 0.1% against the projected 0.2%.
- A softening in Retail Sales growth could potentially affect the US Dollar by affirming investors’ belief in the ongoing disinflation process.
- Regarding the Fed speakers, Cleveland Fed President Loretta Mester expressed her preference to observe a “longer run of good-looking inflation data” before any significant decisions are taken.
- Simultaneously, Neel Kashkari, President of the Minneapolis Fed, intimated that the Fed might wait until December for any further rate cuts, favoring the acquisition of more data before any actions are undertaken.
- Several other speakers will be on the wires on Tuesday, and their words might shake the USD.
DXY technical analysis: Momentum flattens, bulls running out of time
Technical indicators suggest a flattening momentum but still retain a positive stance. The Relative Strength Index (RSI) remains above the 50 level, while the Moving Average Convergence Divergence (MACD) continues to print green bars.
With the bullish activity taking a pause, the DXY Index continues to hold above its 20, 100 and 200-day Simple Moving Average (SMA). The slowing down of the momentum from last week might indicate a possible slowdown in the recent rally of the DXY.
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.