After Federal Reserve (Fed) Chairman Jerome Powell’s recent statements, the US Dollar managed to regain some lost ground. Powell’s reluctance to immediately embrace rate cuts in favor of a patient approach has led to a rise in the DXY to 105.20. While the US economic outlook shows signs of disinflation, there are expectations for a rate cut in September. However, Fed officials are cautious and prefer to wait for concrete data before making any decisions.
Investors remain confident in a potential rate cut in September, as indicated by the Federal Reserve’s approach. Powell emphasized the importance of encouraging economic data to support the Fed’s inflation management efforts. While the focus is on meeting-by-meeting policy decisions, the data needs to consistently show progress towards the 2% inflation target. The upcoming US Consumer Price Index (CPI) report on Thursday will provide further insights into the inflation trajectory.
Technical Analysis of the US Dollar
Despite a recent downturn that saw the DXY lose value and slip below the 20-day Simple Moving Average (SMA), there are signs of recovery. The US Dollar is currently trading above the 100-day SMA, with indicators like the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) showing positive momentum. The 100-day SMA at the 104.78 zone has acted as a strong support level, preventing further declines. Additional support levels at 104.50 and 104.30 will be crucial in determining the USD’s future movement.
Understanding the US Dollar
The US Dollar holds a significant position in the global economy as the most traded currency in the world, with over 88% of all foreign exchange turnover. Following the Bretton Woods Agreement in 1971, the USD became the world’s reserve currency, replacing the British Pound. The Federal Reserve plays a pivotal role in shaping the value of the US Dollar through monetary policy decisions. By adjusting interest rates to control inflation and promote full employment, the Fed influences the USD’s strength in the market.
Monetary policy decisions by the Federal Reserve have a direct impact on the value of the US Dollar. When inflation exceeds the Fed’s target of 2%, interest rates are raised to strengthen the USD. Conversely, lowering interest rates to combat low inflation or high unemployment weakens the Greenback. In extreme cases, the Fed resorts to measures like quantitative easing (QE) to stimulate the economy. QE involves increasing credit flow by purchasing government bonds, which usually leads to a weaker USD. On the other hand, quantitative tightening (QT) involves reducing bond purchases and can have a positive effect on the US Dollar.