- US Dollar price action rallies with several BRIC countries coming out in favor of the Greenback.
- Fed members repeat the same message, foreshadowing an unchanged message from Powell at Jackson Hole on Friday.
- The US Dollar Index strengthens as hope dampens for any near-term rate cuts.
The US Dollar (USD) is being ruthless for Scandinavian currencies as the Greenback advances nearly 1% against the Norwegian Krone (USD/NOK) and the Swedish Krona (USD/SEK) after the turnaroudn from Tuesday. The 180-degree change in sentiment just hours after the US opening bell had rung was the sum of headlines on Tuesday. Fed officials are keeping their mouths firmly shut on rate cuts. The BRIC meeting on dedollarization has a few important countries speaking out in favor of keeping the US Dollar as a trade currency. Last but not least, some geopolitical tensions trigger Greenback favor during US trading hours.
All eyes are on the chunky data calendar this Wednesday with the S&P Purchase Managers Index (PMI). New homes sales to come out as well and could confirm the slowdown in the housing sector, which was the key takeaway from the existing home sale numbers on Tuesday. Watch out for more headline risks today as chipmaker Nvidia is due to deliver earnings, which could make or break the current risk-on sentiment in equity markets.
Daily digest: US Dollar going in for the kill
- While the US 10-year yield retreats off the highs, the 30-year fixed mortgage rate jumps to 7.31%, highest since 2000.
- The US economic calendar started at 11:00 GMT with the weekly Mortgage Bankers Association (MBA) Mortgage Applications for the week of August 18. The applications sunk from -0.8% to -4.2%.
- At 13:45 GMT S&P will print its Purchasing Managers’ Index (PMI): The Services Index is expected to stay steady from the previous 52.3 reading and print 52.2 for August. The Manufacturing Index is expected to stay in contraction, moving from 49 to 49.3. The overall Composite Index stays unchanged at 52.
- At the stroke of 14:00 GMT, New Home Sales numbers will come out. The Existing Home Sales numbers from Tuesday showed a slowdown in selling, while property inventories remained roughly the same. If a similar picture is being shown in the new houses, it could point to a global slowdown in the housing sector as these elevated mortgage levels are slowing down demand.
- This Wednesday, the US Treasury Department will auction a 20-year bond.
- The BRICS convention starts its second day in South Africa with the organisation welcoming nearly 20 new members. The major theme will be the discussion on dedollarization and the setup of a payment system between the nations. India, Brazil and South Africa have already came out opposing the idea of disregarding the US Dollar, making the meeting as such a non-event and no threat yet for the Greenback as trade currency.
- Equities are up across the board, be it with mild gains and no real outliers. Equity markets are on the lookout for Nvidia earnings, which could make or break the current tech rally for NASDAQ and possibly spill over into the other indices and stock markets across the globe.
- The CME Group FedWatch Tool shows that markets are pricing in an 86.5% chance that the Federal Reserve will keep interest rates unchanged at its meeting in September.
- The benchmark 10-year US Treasury bond yield trades at 4.25% after touching a new yearly high on Tuesday. The bond market will be very sensitive to any news on Friday at the Jackson Hole Symposium. The whole US yield curve could move up or down depending on the speech from Fed Chairman Jerome Powell.
US Dollar Index technical analysis: will DXY be able to close above 104?
The US Dollar is defying friend and foe after it rallied firmly in the US trading session, erasing all earlier gains. The US Dollar Index (DXY) was even briefly in distress during the European session when it broke below the important 200-day Simple Moving Average (SMA). In a skateboard, 180-degree flip, the DXY was able to eke out gains and even print a fresh two-month high at 103.71 and does not seem to stop again this Wednesday.
On the upside, 104.00 is the level to reach. The high of Friday at 103.68 is vital and needs to get a daily close above it in order for the DXY to eke out more monthly gains. Should this US Dollar strength persist for the last part of this year, May’s peak at 104.70 could become the reality again.
On the downside, several floors are likely to prevent a steep decline in the DXY. The first one is the 200-day Simple Moving Average (SMA) at 103.18, which already broke Tuesday and Wednesday. Passing below the 103.00 figure, some room opens up for a further drop. However, around 102.38 both the 55-day and the 100-day SMAs await to catch any falling knives.
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.
