- US Dollar recovers ground after mixed August Nonfarm Payrolls data.
- Fed official downplayed discussions of a larger rate cut in September than 25 bps.
- Markets are seeing 40% odds of a 50 bps cut in the next Fed meeting.
The US Dollar Index (DXY), a measure of the US Dollar against a basket of six currencies, recovered its footing on Friday after the release of August Nonfarm Payrolls (NFP) data came in mixed. Following the data, the probabilities of the Federal Reserve (Fed) implementing a 50 bps rate cut in September remains high, but Fed officials might not embrace it yet.
Despite positive economic indicators, the market may be exaggerating its expectations for aggressive monetary policy easing. The current growth rate exceeds the long-term trend, signaling that markets may be overestimating the need for such measures. However, a 25 bps cut is a done deal.
Daily digest market movers: US Dollar recovers as markets digest mixed NFPs
- US Dollar held its ground after a weaker-than-expected NFP report for August, which showed 142,000 new jobs created against a forecast of 160,000.
- Despite the headline miss, the Unemployment Rate fell to 4.2% as anticipated, while Average Hourly Earnings rose 3.8% YoY, topping expectations.
- Probability of a 0.50% rate cut by the Fed in September remains at 40%, but a 25 bps cut is now seen as a mere certainty.
- Following the data, Chicago Fed President Austan Goolsbee indicated that the Fed is beginning to align with the market’s view on rate cuts.
- However, Goolsbee downplayed the discussion of a larger rate cut in September.
DXY technical outlook: DXY bears maintain dominance, resistance at 101.60
Technical analysis suggests a bearish outlook for the DXY index as indicators remain negative, indicating bearish dominance. A recovery above the 20-day SMA average (currently around 101.60) could signal a shift in sentiment.
Supports: 101.30, 101.15, 101.00
Resistances: 101.60, 102.00, 102.30
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named 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 during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
