US Dollar mildly strengthens following Powell’s Congressional testimony

US Dollar regained some ground afterJerome Powell’s comments.
Market retains confidence in a September rate cut.
Investors await June’s CPI snapshot of US inflation on Thursday.

The US Dollar staged a minor comeback and the DXY rose to 105.20, courtesy of Federal Reserve (Fed) Chairman Jerome Powell’s recent congressional comments, which shied away from embracing rate cuts in the immediate future, advocating for patience instead.

Tinged with disinflation indicators, the US economic outlook has raised hopes of a September rate cut. That said, Fed officials are in no rush to implement cuts, choosing instead to rely on data-centric indicators before making such decisions.

Daily digest market movers: DXY up as markets assess Powell’s words

Fed Chair Jerome Powell’s Semiannual Monetary Policy Report to Congress and his testimony before the Senate Banking Committee are the standout events on Tuesday.
Powell re-emphasized the need for encouraging economic data to shore up the Fed’s confidence in managing inflation effectively.
He underscored that it is not only high inflation that poses a risk but is apprehensive about announcing a rate cut until there is assured evidence that inflation is consistently gravitating toward the 2% target.
However, he stressed the importance of meeting-by-meeting policy decisions, admitting that while progress has been made toward the 2% inflation goal, the recent data needs to be more encouraging to warrant a rate cut.
US Consumer Price Index (CPI) arrives on Thursday and will be closely watched by market participants.
YoY CPI headline inflation is forecasted to decelerate by two points to 3.1%, and the core reading is expected to hold steady at 3.4%.
As per the CME FedWatch Tool, the probability of a rate cut in July remains below 10% but at approximately 80% for September.

DXY technical outlook: Recovery seems possible as DXY stays above 100-day SMA

While technically speaking the DXY experienced a downturn, losing 0.80% in value and slipping below its 20-day Simple Moving Average (SMA) last week, some recovery is now detected above the 100-day SMA. Both the Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD) indicators have retreated into negative territory but are presenting better and gained momentum on Tuesday.

Nevertheless, the 104.78 zone, denoted by the 100-day SMA, has held strong, repelling sellers and thereby reestablishing support. Below there, the 104.50 and 104.30 zones could potentially act as robust backstops against further declines.

Fed FAQs

Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.

The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.

In extreme situations, the Federal Reserve may resort to a policy named 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 during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.

Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.

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