US Dollar gives up further ground as markets asses fresh Retail Sales figures
- The US Dollar Index fell close to 107.00 after Thursday’s sharp decline.
- US Retail Sales fell 0.9% in January, missing expectations and fueling rate cut speculation.
- US Treasury yields continue to decline with the 10-year yield below 4.50%.
The US Dollar Index (DXY), which tracks the US Dollar’s performance against six major currencies, remains stable after posting losses in the previous session. At the time of writing, the DXY hovers around 107.00, as economic data continues to paint a mixed picture. Weak Retail Sales weigh on sentiment, but Industrial Production provides some support.
Daily digest market movers: US Dollar weakens as traders reassess Fed outlook
- US Retail Sales dropped 0.9% in January, far worse than the -0.1% forecast, raising concerns about consumer spending.
- December Retail Sales were revised higher to 0.7%, slightly offsetting the latest disappointing data.
- Industrial Production rose 0.5% in January, beating expectations of 0.3% but slowing from December’s 1.0% growth.
- Weak Retail Sales may lead traders to reassess expectations for the Federal Reserve’s rate path.
- Fed Chair Jerome Powell reiterated that monetary policy adjustments require tangible inflation progress or labor market weakness.
- As for now, the CME FedWatch Tool now shows a 55% probability of unchanged rates in June, reflecting market uncertainty.
- US Treasury yields continue to decline sharply with the 10-year yield falling to 4.47% and making investors lose interest in the US Dollar.
DXY technical outlook: Further downside risk as bearish momentum builds
The US Dollar Index remains under pressure after losing the 20-day Simple Moving Average (SMA), signaling a bearish shift. The Relative Strength Index (RSI) continues to weaken, confirming negative momentum, while the Moving Average Convergence Divergence (MACD) remains entrenched in bearish territory.
Immediate support is seen at the 100-day SMA near 106.30 with a break below this level likely to confirm a short-term negative outlook. On the upside, resistance is now seen at 107.50, followed by the 20-day SMA at 108.00.
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.
