US Dollar consolidates gains as PBoC, Powell support the Greenback

• The US Dollar edges up as investors digest  many events in the first part of the trading day.
• Focus shifts to US GDP numbers after Powell’s speech. 
• The US Dollar Index is firmly in the green, consolidating ground above 102.50 with a flirt at 103.00

The US Dollar (USD) is having a lot to digest this morning. Spanish inflation fell less than expected, making the Euro outperform the Greenback, while the Swedish Riksbank dropped the ball with a dovish hike, prompting  the Swedish Krona to depreciate substantially against the US Dollar. US Federal Reserve (Fed) Chairman Jerome Powell already hit the stage at the start of the European session and  made a carbon print of what he said on Wednesday by again committing to two more interest-rate hikes, possibly consecutive ones. As if that was not enough, the People’s Bank of China (PBoC) fixed its Yuan again firmly stronger against the US Dollar, in a one-trick-pony as seen on Tuesday. 

With Powell already out of the way, traders will be fully focused on two batches of economic data to come out. Main attention will be at 12:30 GMT with the final estimate of the US Gross Domestic Product (GDP) for Q1, which is  expected to come in at an annualized rate of  1.3%, unchanged from the previous estimate. The GDP Price Index is also seen stable at 4.2%. At that same time, the US Labor Department will  publish the weekly Jobless Claims data, with Initial Claims expected at 265K, from 264K previous, and the Continuing Jobless Claims are expected to head higher from 1.759 million to 1.765 million. 

Daily digest: US traders in for a wild ride

• The Swedish central bank (Riksbank) opted for a 25 basis point hike this morning. The bank also issued the commitment that it will defend its currency with interventions. This means the market could challenge this commitment, underpinning the Greenback against the Swedish Krona and other Scandinavian currencies such as Danish Krone (USD/DKK) and Norwegian Krone (USD/NOK). 
• China’s PBoC tried to surprise markets again with a stronger fixing of its Yuan against the US Dollar. This time markets shrugged off the move as insufficient and even sent USD/CNH substantially higher to nearly Wednesday’s level  near 7.27. USD/CNH trades in the green and further weakening of the Yuan is expected against the Greenback. 
• First big batch of data will come out at 12:30 GMT with the US GDP numbers. Economic growth for the first quarter is expected at an annualized rate of 1.3%, unchanged from previous estimates, and the GDP Price Index is seen  at 4.2%, also unchanged.  Jobless Claims, also due 12:30 GMT,  are expected to show broadly stable Initial Claims – up 265k from 264k last week – while Continuing Claims are expected to edge up to 1.765 million from 1.759 million the previous week. 
• Second batch of data at 14:00 with Pending Homes sales data for May.. The monthly number is expected to jump from 0% to 0.2%. On a yearly basis, pending home sales are expected to  decline 21.9%, more than the 20.3% decrease seen in April. 
• One US Fed speaker is expected after Powell. Atlanta Fed President Raphael Bostic will give a speech on the US economic outlook at the Irish Association of Investment Managers Annual Dinner at 19:00 GMT. 
• The US banking stress test results were published on Wednesday, and all 23 biggest banks passed it with flying colours.  
• In early European trading, US Fed chairman Jerome Powell made a copy-paste of his Wednesday speech. Powell repeated that the majority of FOMC members see two or more rate hikes by year-end. 
• The equity gains from Wednesday were getting pared back in Asia trading as both the Japanese Topix and the Chinese Hang Seng closed in the red. European markets are very mixed, baffled by Spanish inflation falling less than expected and indications that German inflation will accelerate, triggering the risk that more monetary tightening might be needed from the ECB.  
• The CME Group FedWatch Tool shows that markets are pricing in a 81.8% chance of a 25 basis points (bps) interest-rate hike on July 26th. After US Fed chairman Powell repeated twice in the past 24 hours that the Fed is committed to hiking twice, markets are sticking reluctant to the one-and-done belief. 
• The benchmark 10-year US Treasury bond yield trades at 3.74% after a wild ride in the last 24 hours. On Wednesday, the 10-year T-note dropped to almost 3.70% as bonds were bid again and this morning saw the full drop pared back as European inflation proved sticky.

US Dollar Index technical analysis: USD advances in eventful start of the day

The US Dollar trades against most peers in the green, with only three main outliers to mention: the Japanese Yen (USD/JPY), the Australian Dollar (USD/AUD) and the New Zealand Dollar (USD/NZD). The move comes after a very eventful morning in Europe where inflation flared up and the Swedish Riksbank committed to defend its currency. That triggered a knee-jerk reaction and pulled the US Dollar Index (DXY) back down below 103.00, though the DXY is recovering from earlier pulldown moves.

On the upside, the 100-day Simple Moving Average (SMA) briefly got pierced through at 103.04 and next saw the DXY retreat by a stronger Euro and Yuan. It looks like those pairs are reversing again in favor of US Dollar strength and might push the DXY back above 103.00. Once that happens, look for 103.50 as the next key level to the upside. 

On the downside, the 55-day SMA near 102.67 is up for proving its reliability as a support element after being chopped up that much in the last two weeks. A touch lower, 102.50 will be vital to hold from a psychological point of view.  In case the DXY slips below 102.50, more weakness is expected with a full slide to 102.00 and a retest of June’s low at 101.92.

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.