Major central banks are set to discuss monetary policy soon, with the Federal Reserve taking center stage. As expectations for easing measures wane, the value of the US dollar has dipped while Treasury yields have seen an uptick, particularly as traders look forward to US retail sales data.
Here’s what to expect on Tuesday, September 16th:
The US Dollar Index (DXY), which measures the dollar’s value against six currencies, slipped 0.32% to 97.30, marking nearly eight weeks of decline. Retail sales in the US are anticipated to slow in August, which may exert further downward pressure on DXY, having previously increased by 0.3% month-over-month and 0.5%. Other important figures include industrial production data.
EUR/USD has gained over 0.26%, surpassing 1.1750. This rise follows market participants’ dismissal of Fitch’s downgrade of France’s credit rating from AA- to A+. According to Isabelle Schnabel, a member of the European Central Bank (ECB), the economy is resilient, with full employment and stable inflation hovering around the 2% target. On Tuesday’s agenda are ECB’s Escribus Peach, inflation updates from Italy, the ZEW survey for Germany and the Eurozone for September, and industrial production across Europe.
The GBP/USD is expected to breach 1.3600 as traders anticipate July’s UK employment data, which is expected to show an ILO unemployment rate of 4.7%. Additionally, market watchers are focused on the Bank of England’s (BOE) policy decisions coming later this week.
USD/JPY saw a decline as the US dollar weakened against most major currencies, though the Bank of Japan is expected to raise prices later in the year. On Tuesday, Japan’s exports for August are estimated to improve to -1.9% (up from -2.6% in July), while imports might decrease by 4.2% year-over-year.
USD/CAD experienced a sharp drop of 0.49%, falling below 1.3800 as investors priced in the Fed’s expected cuts and anticipations of inflation data rising from 1.7% to 2%, aligning with the Bank of Canada’s inflation target.
Gold prices continue to reach new highs, and US Treasury yields reflect a market belief in a potential 25 basis points rate cut by the US Central Bank, with prices possibly testing $3,700 this week. If XAU/USD retracts below $3,650, it could dip to $3,600; otherwise, we might see further gains for gold.
FAD FAQ
US monetary policy is largely shaped by the Federal Reserve System, which has a dual mission: achieve price stability and promote full employment. The primary tool for reaching these goals is adjusting interest rates. When inflation surges beyond the Fed’s 2% target, rates go up, increasing borrowing costs and making the dollar stronger as the US becomes a more attractive option. Conversely, if inflation dips below 2% or unemployment rises too high, the Fed may lower interest rates to stimulate borrowing.
The Federal Reserve meets eight times a year to assess the economic landscape and decide on monetary policy. The Federal Open Market Committee (FOMC) consists of 12 federal officials—seven from the Governor’s Committee, the Fed Chairman from New York, and four out of the other 11 Regional Reserve Bank presidents, who serve on a rotating basis for one year.
In extreme situations, the Fed can implement a policy known as Quantitative Easing (QE). QE is a method used to significantly enhance the credit flow within the economy, usually invoked during crises or periods of low inflation, like during the 2008 financial crisis. It involves the Fed printing more money to purchase high-quality bonds from financial institutions, which often leads to a weaker dollar.
Quantitative Tightening (QT) is the opposite of QE, wherein the Fed ceases bond purchases from financial institutions and refrains from reinvesting the principal from maturing bonds. Typically,QT supports an increase in the value of the US dollar.
