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.
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.