After facing a rough start on Monday, the US Dollar (USD) managed to recover on Tuesday and is currently hovering near the 103.00 mark. This recovery can be attributed to renewed market sentiment and a general improvement in the overall economic outlook. The absence of any major news regarding the conflict between Iran and Israel has also played a role in supporting the Dollar’s current position. However, despite these gains, the trajectory of the Greenback throughout the day may be limited by the high dovish bets on the Federal Reserve (Fed) and the ongoing fears of a possible recession.
The market is currently anticipating a rate cut by the Fed in September, which is likely to lead to a subsequent weakening of the USD. Additionally, there are indications that the market is pricing in a 100 basis points (bps) rate cut by the end of the year, with some odds of an additional 25 bps. This totals over 200 bps of easing for the coming year, assuming there is no significant economic downturn in the US. The market is eagerly awaiting new data to assess the Fed’s easing narrative and its impact on the USD.
Technical Analysis and Outlook
On the technical side, the Dollar Index (DXY) has recently experienced a bearish turn after a sharp decline in the Relative Strength Index (RSI). The RSI, which had fallen into oversold territory in the previous trading sessions, showed signs of recovery on Tuesday. However, the outlook for the DXY remains bearish, with the index still trading below its key moving averages. The levels to watch include supports at 102.50, 102.20, and 102.00, as well as resistances at 103.00, 103.50, and 104.00.
Monetary policy in the US is primarily shaped by the Federal Reserve (Fed), which has dual mandates of achieving price stability and fostering full employment. The Fed uses interest rate adjustments as its primary tool to achieve these goals. When inflation is above the Fed’s 2% target, it raises interest rates to combat rising prices, making the USD more attractive to international investors. Conversely, when inflation falls below 2% or unemployment is high, the Fed may lower interest rates to stimulate borrowing and consumption, which tends to weigh on the Greenback.
In extreme situations, the Fed may resort to a policy known as Quantitative Easing (QE) to increase the flow of credit in the financial system. This involves the Fed purchasing high-grade bonds from financial institutions, which usually leads to a weakening of the USD. On the other hand, Quantitative Tightening (QT) is the reverse process, where the Fed stops buying bonds and reduces its balance sheet, which tends to have a positive impact on the value of the USD.
The future of the USD remains uncertain as market sentiment continues to fluctuate, and the Fed’s easing policies remain a key factor in shaping the currency’s outlook. It is essential for investors to closely monitor incoming data and Fed announcements to gauge the direction of the USD in the coming months.