The US Dollar Index (DXY) has been on a downward trend lately, hitting lows not seen since April. This can be attributed to the disappointing US Consumer Price Index (CPI) figures released recently, along with softer University of Michigan (UoM) sentiment data. These factors have bolstered the belief in the market that the Federal Reserve (Fed) will likely implement a rate cut in September.
Despite the strong Producer Price Index (PPI) data, with an increase to 2.6% year-over-year, the US Treasury yields have been falling. This has diminished the attractiveness of the US Dollar to investors. Even though the core PPI also showed an increase of 3%, the overall sentiment towards the USD remains bearish.
The CME FedWatch Tool is currently indicating an 86% probability of a 25-basis-point rate cut in September, with some investors even speculating a 50-basis-point cut. The Fed has reiterated that any decisions will be data-dependent, with a focus on rigorous analysis before implementing significant changes.
The Federal Reserve plays a critical role in shaping the monetary policy of the United States. With mandates to achieve price stability and full employment, the Fed adjusts interest rates accordingly. When inflation surpasses the target of 2% or when unemployment rates are high, the Fed may lower interest rates to encourage borrowing, which typically weakens the US Dollar.
In times of crisis or extremely low inflation, the Federal Reserve may resort to Quantitative Easing (QE). This involves increasing the flow of credit in the financial system by purchasing high-grade bonds. QE generally weakens the US Dollar as it leads to an influx of newly printed currency. On the contrary, Quantitative Tightening (QT) is the process of reducing the flow of credit by not reinvesting in new bonds, which tends to have a positive effect on the value of the US Dollar.
Despite a slight possibility of an upward correction, the technical indicators such as the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) still point towards a negative trajectory for the US Dollar Index. With the index trading at its lowest level since April, the overall sentiment remains bearish.
The US Dollar’s performance in the coming months will be closely tied to the Federal Reserve’s monetary policy decisions and the economic indicators released. With market expectations leaning towards a rate cut in September, it is likely that the USD will continue to face downward pressure. Investors should closely monitor future data releases and Fed statements to gauge the trajectory of the US Dollar in the near future.
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