US Dollar stabilizes ahead of more of Powell guidance

• The US Dollar is near key levels against a few of its most important currencies. 
• Main focus for this week will be on Powell and US Gross Domestic Product for Q1.
• The US Dollar Index is in a Catch-22 between two important levels.

The US Dollar (USD) is in a very mixed tone at the start of this week, with a very small pattern to draw as conclusion from its performance against most major currencies. The US Dollar trades at key peak levels against the Australian Dollar and the Chinese Yuan, both very much dependent on one another because Australia is the biggest supplier to China in terms of commodities. On most other fronts, the US Dollar is retracing a bit, coming off its peak performance of last week, making the US Dollar Index (DXY) very mixed and trading rather sideways at the moment. 

This week traders will not be able to already start planning for their summer holidays as a few big events are set to take place. Big attention for the European equivalent of the US Federal Reserve’s Jackson Hole Symposium, as the European Central Bank (ECB) is organising its symposium in Syntra, Portugal. US Fed Chairman Jerome Powell will deliver two speeches on that event on Wednesday and Thursday, while markets can feast on data points like the Durable Goods on Tuesday at 12:30 GMT, the final estimate of the US Gross Domestic Product (GDP) on Thursday at 12:30 GMT and the Personal Consumption Expenditure (PCE) Price Index at 12:30 GMT on Friday. 

Daily digest: US Dollar faces an uneventful monday in an eventful week

• Japan's vice finance minister for international affairs Masato Kanda said that the recent FX moves have been rapid and excessive and he does not rule out any options on interventions in FX. This could point to possible FX interventions from Japan’s Finance Ministry in order to appreciate the Japanese Yen. 
• US President Joe Biden announced he will deliver remarks on his Economic plan on Wednesday. 
• A very light data calendar for the US on Monday, with only GMT the Dallas Fed Manufacturing Activity Index on the docket at 14:30 GMT. Previous was at -29.1 with the expected number to come out at -26.5.
• The US Treasury is heading to markets for some short-term tenors with a 3-month, 6-month and a 2-year bond auction.  
• No Fed speakers expected. 
• Western Texas Intermediate (WTI) Crude Oil jumps on the back of geopolitical news over the weekend where the Wagner Group was on its way to Moscow.. Chances, or at least the idea, that this chokehold war could come to an end, could help the global recovery and thus might lead in a pickup to demand. Crude Oil jumped briefly to $70.11 at the start of the session but is now back at its opening rice near $69.20.
• Equities are continuing their sell-off as all indices are back in the red this Monday with Japan’s Topix closing this first trading day of the week at -0.20%. Meanwhile, European stock markets are all in the red and US equity futures are pointing to a red opening. 
• The CME Group FedWatch Tool shows that markets are pricing in a 71.9% chance of a 25 basis points (bps) interest-rate hike on July 26th. The certainty of one more hike has increased as US Fed Chairman Powell remained hawkish in the recent two hearings, though markets remain reluctant to price in that second rate hike.  
• The benchmark 10-year US Treasury bond yield trades at 3.68% and heads lower as bonds are bid on Monday. The move is to be noted in other regions as well as for example German Bonds are seeing higher prices as well. 

US Dollar Index technical analysis: Wait and hold

The US Dollar is advancing this Monday against the Australian Dollar and the Chinese Yuan while on other fronts the Greenback is pairing back some of its gains from last week. The reason for this could be seen as that Australia is very dependent on the demand from China toward commodities and the lacklustre reopening story from China is hurting the Australian economy, making investors and traders short both currencies. This makes the US Dollar Index (DXY) very mixed as only two notable weak underperformers stand over a bulk of stronger currencies, making the DXY trading sideways to lower. 

On the upside, the 100-day Simple Moving Average (SMA) briefly touched at 103.06, remains as level to break above and hold. That attempt failed last week, and could demand more conviction from the Greenback in order to head and stay above that level. Once that happens, look for 103.50 as the next key level to the upside. 

On the downside, the 55-day SMA near 102.60 should normally be back into support-mode. Though, it has been chopped up quite a bit last week, so it starts to lose its importance a bit. Rather keep in mind 102.50 and 102.00 as downside supports to look for. 

How does Fed’s policy impact US Dollar?

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.