US Dollar trades gently higher, following strong Retail Sales, Middle East tensions

DXY Index notes a slight uptick, currently trading near 106.00 mark.
March Retail Sales exceed forecasts, bolstering bond yields and the US Dollar.
Fed appears hawkish, adjustments to easing expectations produced Greenback rally last week.

The US Dollar Index (DXY) is currently trading higher near 106.05 on Monday, slightly down from its peak of 106.10 hit last week. Strong economic data continues to favor the hawkish rhetoric from the Federal Reserve (Fed), and the Greenback benefits from rising US Treasury yields. Tensions between Israel and Iran also contribute to a cautious market mood, which tends to favor the US Dollar.

The US economy shows robustness with Q1 growth indicating resilience and rising consumer spending backed by sturdy labour demand. The Fed’s stance leans toward hawkishness, adjusting its easing expectations and starting to signal a delay in rate cuts, buoyed by continuous robust growth and persistent inflation.

Daily digest market movers: DXY gains some ground as US Retail Sales surpass expectations

The US Census Bureau revealed that March’s Retail Sales grew by 0.7% growth YoY, which is more than double the anticipated yearly growth rate of 0.3%.
In reflection of the Fed position, hawkish sentiment continues to dominate as last week officials started to hint at a delay of rate cuts.
Regarding expectations, the likelihood of a June cut fell to 25%, marking a decline from the previous week’s 60%. Concurrently, the probability for a July cut fell below 60%, in stark contrast to its previous full certainty.
The market now predicts the first cut in September, with only a 75% likelihood of a second cut in December.
US Treasury bond yields remain high, the 2-year yield stands at 4.94%, the 5-year yield at 4.65%, and the 10-year yield is set at 4.63%.

DXY technical analysis: DXY shows overbought conditions, might correct in the next sessions

The technical indicators on the daily chart reflect overbought conditions through the Relative Strength Index (RSI). This signifies that buyers have been dominating recently, driving up the value of DXY. However, this can often precede a correction if buyers become exhausted.

Simultaneously, the Moving Average Convergence Divergence (MACD) corroborates this leaning, exhibiting rising green bars. Such a pattern usually signals that the buyers have considerable momentum at their back.

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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