US Dollar recovers modestly ahead of US data

US Dollar holds its ground early Monday after having suffered heavy losses last week.
US Dollar Index fluctuates in a tight channel slightly below 100.00.
US economic docket will not offer any high-impact data releases. 

The US Dollar manages to stay relatively resilient against its major rivals at the beginning of the week as markets adopt a cautious stance. The US Dollar Index (DXY) clings to small recovery gains at around 100.00 on Monday after having lost more than 2% last week.

The US economic calendar will not feature any high-tier macroeconomic data releases that could impact the DXY’s movements. Hence, the risk perception could continue to drive the US Dollar’s valuation in the second half of the day. 

The US Census Bureau will release June Retail Sales data on Tuesday and the Federal Reserve (Fed) will publish Industrial Production figures.  

Daily digest market movers: US Dollar selloff pauses Monday

China’s real Gross Domestic Product (GDP) expanded at an annual rate of 6.3% in the second quarter, according to the release from China’s National Bureau of Statistics (NBS) early Monday. This reading followed the 4.5% growth recorded in the first quarter but came in below the market expectation of 7.3%. Citigroup announced that they had lowered the full-year growth forecast for China to 5% from 5.5%.
The Shanghai Composite lost nearly 1%, while Wall Street’s main indexes opened virtually unchanged. 
US Treasury Secretary Janet Yellen told Bloomberg on Monday that there is a good chance that they will go ahead with outbound investment controls on China.
The US Dollar weakened last week as soft inflation data from the US revived expectations about the Federal Reserve reaching the terminal rate with a 25-basis-point (bps) rate hike in July.
The Consumer Price Index (CPI) in the US rose 3% on a yearly basis in June, following the 4% increase recorded in May. The annual Producer Price Index (PPI) edged 0.1% higher in the same period.
Commenting on the USD’s outlook, “In case of an increasingly rapid fall in inflation and weakening economic data, the market might increasingly rely on key rates not remaining at high levels for a long time, whereas rate cuts before the end of the year are becoming increasingly likely,” said Antje Praefcke, FX Analyst at Commerzbank. “That would cause the USD to ease further.” 
The University of Michigan reported on Friday that the Consumer Confidence Index improved to 72.6 in July’s flash estimate from 64.4 in May.
The benchmark 10-year US Treasury bond yield holds steady at around 3.8% after having declined nearly 6% last week.
The Federal Reserve Bank of New York’s Empire State Manufacturing Survey for July showed that the General Business Conditions Index declined to 1.1 from 6.6 in June.
Markets are nearly fully pricing in a 25 bps Fed rate increase in July. The probability of one more rate hike in December stands at around 20%, according to the CME Group FedWatch Tool.
Other data from China showed that Retail Sales increased 3.1% on a yearly basis in June, down sharply from 12.7% in May, while Industrial Production expanded 4.4% in the same period.

Technical analysis: US Dollar Index is still technically oversold

The US Dollar Index (DXY) closed in positive territory on Friday but struggled to extend its rebound on Monday. The Relative Strength Index (RSI) indicator on the daily chart remains below 30, suggesting that the DXY is still oversold. Hence, sellers could wait for a technical correction before betting on further USD weakness.

On the upside, 100.00 (psychological level) aligns as first resistance. A daily close above that level could open the door for a rebound toward 101.00 (former support, static level). 

99.20 (static level from March 2022) could be seen as the next bearish target once the DXY completes a correction. Below that level, 99.00 (psychological level) is likely to act as interim support before 98.30 (200-week Simple Moving Average).

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.

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