- Expectations for Fed easing continue to evolve, with two rate cuts by year-end almost priced in.
- Retail sales unexpectedly rose in September, and weekly new jobless claims fell.
- The ECB's Lagarde is concerned about the EU's economic outlook, which is benefiting the US dollar.
The US Dollar Index (DXY), which measures the value of the US dollar against a basket of six currencies, continued its upward trajectory, marking its fifth straight day of gains. At the time of writing, DXY is trading near 104.00.
The jump came after European Central Bank (ECB) President Christine Lagarde expressed concern about the eurozone's economic outlook and expressed concern that the region could face further economic downturn. Additionally, positive data from the US including retail sales and weekly new jobless claims also benefited the dollar.
Although the U.S. economy has shown recent signs of economic recovery, markets continue to price in the possibility of two interest rate cuts by the end of the year.
Daily digest of market moves: USD gains on positive data, bets on easing increase
- Expectations for Fed easing are rising, with markets pricing in two rate cuts by the end of the year and a total of 150 basis points of easing over the next 12 months.
- Solid economic indicators, including strong U.S. retail sales and a healthy labor market, continue to support a solid economic outlook.
- U.S. retail sales had a surprising upturn in September, rising 0.4% to $714.4 billion, beating market expectations. U.S. retail sales fell 0.1% in August.
- In the week ending October 11, 241,000 Americans filed new claims for unemployment benefits. This was below the consensus of 260,000 and last week's tally, which was revised upward to 260,000.
DXY technical outlook: DXY maintains bullish momentum
The DXY index maintains its bullish momentum as the indicators continue to gain strength. The index is above the important 100-day simple moving average (SMA) and is targeting the 200-day SMA of 103.80. A break above this level would further strengthen the bullish outlook. However, overbought signals from indicators suggest a possible correction
Support lies at 103.00, 102.50, and 101.30, and resistance lies at 103.30, 103.50, and 104.00. Overall, buyers continue to be in control, but we need to be careful about overbought conditions.
Fed Frequently Asked Questions
Monetary policy in the United States is shaped by the Federal Reserve Board (Fed). The Fed has two responsibilities: achieving price stability and promoting full employment. The main tool to achieve these goals is to adjust interest rates. If prices rise too fast and inflation exceeds the Fed's 2% target, interest rates will be raised, increasing borrowing costs for the entire economy. This makes the US a more attractive place for international investors to put their money, and the US dollar (USD) appreciates. If inflation falls below 2% or unemployment is too high, the Fed could lower interest rates to encourage borrowing, which would weigh on the dollar.
The Federal Reserve (Fed) holds eight annual policy meetings where the Federal Open Market Committee (FOMC) assesses economic conditions and decides on monetary policy. Twelve Fed officials will attend the FOMC meeting. Seven board members, the president of the New York Fed, and four of the remaining 11 regional reserve bank presidents will serve rotating one-year terms. .
In extreme circumstances, the Federal Reserve may resort to a policy called quantitative easing (QE). QE is a process by which the Fed significantly increases the flow of credit in a stalled financial system. This is a non-standard policy tool used in times of crisis or when inflation is extremely low. This was the Fed's weapon of choice during the Great Financial Crisis of 2008. This involves the Fed printing more dollars and using them to buy high-quality bonds from financial institutions. QE typically weakens the US dollar.
Quantitative tightening (QT) is the reverse process of quantitative easing, in which the Federal Reserve stops buying bonds from financial institutions and reinvests the principal of maturing bonds to buy new bonds. Never. It is usually positive for the value of the US dollar.
