The US Dollar (USD) is having a hard time finding demand at the beginning of the week as investors assess the latest macroeconomic data releases from the United States (US) and comments from the Federal Reserve (Fed) officials. The US Dollar Index, which tracks the USD's performance against a basket of six major currencies, registered small losses on Monday and extended its slide below 102.50 early Tuesday.
The US Census Bureau will release the Retail Sales data for April in the early American session on Tuesday and the Federal Reserve will publish Industrial Production report. More importantly, US President Joe Biden will meet with Republican House of Representatives Speaker Kevin McCarthy and three other top congressional leaders at 1900 GMT for the next round of debt limit negotiations.
The US Dollar Index (DXY) closed slightly below the 50-day Simple Moving Average (SMA) on Monday, currently located at around 102.50, and stays below that level on Tuesday. Furthermore, the Relative Strength Index (RSI) indicator on the daily chart retreated to the 50 area, reflecting the loss of bullish momentum.
On the downside, 102.00 (psychological level, static level) aligns as first technical support ahead of 101.75 (20-day SMA). A daily close below the latter could open the door for an extended slide toward 101.00 (psychological level, static level).
In case the DXY manages to stabilize above 102.50, it is likely to face strong resistance at 103.00 (psychological level, 100-day SMA) before targeting 103.60 (static level from February).
The US Federal Reserve (Fed) has two mandates: maximum employment and price stability. The Fed uses interest rates as the primary tool to reach its goals but has to find the right balance. If the Fed is concerned about inflation, it tightens its policy by raising the interest rate to increase the cost of borrowing and encourage saving. In that scenario, the US Dollar (USD) is likely to gain value due to decreasing money supply. On the other hand, the Fed could decide to loosen its policy via rate cuts if it’s concerned about a rising unemployment rate due to a slowdown in economic activity. Lower interest rates are likely to lead to a growth in investment and allow companies to hire more people. In that case, the USD is expected to lose value.
The Fed also uses quantitative tightening (QT) or quantitative easing (QE) to adjust the size of its balance sheet and steer the economy in the desired direction. QE refers to the Fed buying assets, such as government bonds, in the open market to spur growth and QT is exactly the opposite. QE is widely seen as a USD-negative central bank policy action and vice versa.
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