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11.06.2024, 11:30

US Dollar steadies as markets turn cautious ahead of CPI, Fed decision

  • The US Dollar was unable to hold on to Monday’s gains. 
  • The Greenback eases a touch after headlines that Le Pen won’t run in the June French snap elections.
  • The US Dollar index trades just above 105.00 and flirts with nearby support levels.

The US Dollar (USD) trades flat, just above 105.00 on Tuesday, and is unlikely to move away in the coming hours unless something pivotal occurs. Despite its gains from Monday, after French President Emmanuel Macron called for snap elections in June, the sting is being taken out of the event with Marine Le Pen, head of the Far Right movement in France, will not be running in those . This actually eases the odds for an upheaval shift in the upcoming French elections, which are just three weeks away. 

On the economic front, the US Dollar index (DXY) moves alongside political news out of Europe ahead of Wednesday’s main events: the US Consumer Price Index for May and the Federal Reserve (Fed) interest rate decision. Before that, two very light data elements will find their way to the markets on Tuesday: the NFIB Business Optimism Index for May and the Redbook Index for the first week of June. 

Daily digest market movers: Wake me up when Wednesday starts

  • The m ain headline hitting the wires on Tuesday comes from France, where Marine Le Pen, head of the Far Right movement, said she will not be running in the upcoming snap elections at the end of June. This can be considered as a victory for current French President Emmanuel Macron as his government sees its odds of surviving these snap elections rising with Le Pen now backing down. 
  • At 10:00 GMT, the National Federation of Independent Business (NFIB) has released its Business Optimism Index for May. The result was a beat on expectation an the previous print of 89.8, with 90.5 as number for May. 
  • At 12:55 GMT, the Redbook Index for the week ending June 7 will be released. The previous reading was at 5.8%, and no forecast is available. 
  • The US Treasury is set to unleash some debt to the markets
  • 52-week bill auction expected at 15:30 GMT.
  • 10-year Note Auction will be allocated at 17:00 GMT. 
  • Equities are mixed on Tuesday. European indices are recovering on the back of the French elections news, while Chinese stocks are sliding lower by near 1%. US futures are flat. 
  • The CME FedWatch Tool shows a 45.6% chance of the Federal Reserve (Fed) interest rate at the current level in September. Odds for a 25 basic points rate cut stand at 50%, while a very slim 4.4% chance is priced in a 50 basic points rate cut
  • The benchmark 10-year US Treasury Note slides to the lowest level for this week, near 4.44%, and flirts with further declines. 

US Dollar Index Technical Analysis: Yawn!

The US Dollar Index (DXY) could be summarised with one word on Tuesday: Yawn! Expect no big movements, with markets remaining sidelined ahead of the main US events for this week on Wednesday.

On the upside, there are some technical or pivotal levels to watch out for. The first is 105.52, a level that held support during most of April. The next level to watch is 105.88, which triggered a rejection at the start of May and will likely play its role as resistance again. Further up, the biggest challenge remains at 106.51, the year-to-date high from April 16. 

On the downside, a trifecta of Simple Moving Averages is now playing as support. First, and very close, is the 55-day SMA at 105.05. A touch lower, near 104.47, both the 100-day and the 200-day SMA are forming a double layer of protection to support any declines in the US Dollar index. Should this area be broken down, look for 104.00 to salvage the situation. 

US Dollar FAQs

The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.

The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.

In extreme situations, the Federal Reserve can also print more Dollars and enact quantitative easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.

Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.


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