The US Dollar Index (DXY) is currently experiencing losses as US markets remain closed for Memorial Day. Market participants are eagerly awaiting Thursday’s Gross Domestic Product (GDP) and Personal Consumption Expenditures (PCE) data to gain further insights into the Federal Reserve’s stance and the economy’s health. The Beige Book report on Wednesday is also highly anticipated by investors as it is expected to suggest a balanced economic backdrop. The US economy’s robust data allows the Fed to maintain a hawkish stance, supporting the US Dollar despite some signs of labor market softening and weakened consumer spending.
Federal Reserve officials, such as Mester, Bowman, Kashkari, Cook, and Daly, are scheduled to give speeches throughout the week, advocating for a cautious approach. The odds of a rate cut in September stand around 50%, with less than an 80% chance of a cut in November. The outcome of high-tier data, including April’s PCE report and the expected revision of Q1 GDP to 1.3% on Thursday, will continue shaping market expectations on the easing cycle, determining the pace of the USD.
On the technical side, the DXY is facing selling pressure as bulls struggle to gain momentum. The daily chart indicators show escalating bearish momentum, with the RSI indicating selling pressure prevailing. The DXY is currently operating below the 20-day SMA, signaling short-term bearish efficiency, but remains above the 100 and 200-day SMAs, suggesting relative strength for bulls over a longer timeframe.
The Federal Reserve, responsible for shaping monetary policy in the US, has two mandates: achieving price stability and fostering full employment. To accomplish these goals, the Fed adjusts interest rates. When inflation exceeds the 2% target, the Fed raises rates, leading to a stronger USD. Conversely, when inflation falls below 2% or unemployment rates are high, the Fed may lower rates to encourage borrowing, weighing on the Greenback.
The Fed holds eight policy meetings annually, where the FOMC assesses economic conditions and makes monetary decisions. In extreme situations, the Fed may resort to Quantitative Easing (QE) to increase credit flow during crises or low inflation. Quantitative tightening (QT) is the reverse, strengthening the US Dollar by decreasing bond purchases. Understanding these policies and their impact on the economy is crucial for investors and market participants to navigate the ever-changing economic landscape.