US Dollar gains momentum following strong employment and confidence data
- The Two-day FOMC meeting kicks off on Tuesday with a hold priced in for Wednesday’s interest rate decision.
- US consumer sentiment declined in April, while Q1 Employment Cost Index increased.
- Hawkish bets on the Fed continue to favor the USD.
The US Dollar Index (DXY) is presently trading higher at 105.95, while the two-day Federal Reserve (Fed) meeting kicked off. Markets are expecting a hawkish hold by the central bank, but messaging by Jerome Powell will be key. On Tuesday, positive mid-tier data is acting as a tailwind for the Greenback.
The US economy is witnessing resilience and persistent inflation, which makes a case for a hawkish hold by the Federal Open Market Committee (FOMC), which will likely show their lack of confidence in the progress being made.
Daily digest market movers: DXY rises as markets gear up for Fed decision, mid-tier data supports Greenback
- Conference Board's Consumer Confidence Index in the US dropped in April to the lowest level since July 2022, at 97.0, falling from March’s figure of 103.1.
- Elsewhere, the Employment Cost Index in the US rose by 1.2% YoY in the first quarter.
- Market expectations show a 10% chance of a rate cut in June by the Fed, with odds decreasing to 33% for July, and remaining below 75% for September.
- For Wednesday, there are growing expectations for a hawkish surprise due to key Fed officials advocating for patience before initiating easing measures.
DXY technical analysis: DXY recovers as bulls make a stride, bears around the corner
The technical outlook of DXY indicates predominantly bullish momentum. The Relative Strength Index (RSI) presents a positive slope in positive territory, indicating the dominance of the buying side. The flat green bars viewed in the Moving Average Convergence Divergence (MACD) align closely with this bullish sentiment but warn of flattening momentum.
That being said, the index remains above its 20, 100, and 200-day Simple Moving Averages (SMAs). This points consistently toward a dominating bullish backdrop. Hence, even as short-term challenges are dense, the larger trend appears to lean in favor of bulls.
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact 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 when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.