US Dollar sideways as shutdown and strike risk escalates
- The US Dollar turns choppy as strike risks escalate at biggest US car makers.
- Traders will likely keep powder dry for the Fed interest rate decision on Wednesday.
- The US Dollar Index breaks below 105 and rebounce at start US session.
The US Dollar (USD) takes a step back ahead of the US Federal Reserve (Fed) rate decision on Wednesday with headlines risks picking up on the strikes at the three major car builders in the US and US goverment shutdown looming. Expectations are for no hike, though with the recent resurgence in headline inflation via energy prices, US Fed Chair Jerome Powell might be more hawkish than predicted.
Traders, meanwhile, have to split and divide their attention between the Fed and Capitol Hill, with a possible US government shutdown looming again. By Thursday, US House Speaker Kevin McCarthy needs to bring a new stopgap bill to the floor for a vote. If the House fails to pass the bill, the probability of a shutdown in October grows more dire.
Daily digest: US Dollar facing tailrisks
- A mixed bag of data from the housing side where Building Permits rose from 1.443 million to 1.542 million. Housing starts dropped from 1.452 million to 1.283 million against previous month.
- The US Redbook dropped substantially from 4.6% to 3.6%,
- US Treasury Secretary Janet Yellen commented that a soft landing for the US economy is in the works.
- More strikes are set to emerge as talks fail between the unions and the biggest car makers in the US. At risk, strikes could start biting into the Gross Domestic Product (GDP) by 0.3% analysts calculated.
- The US Treasury will be auctioning 20-year Treasuries.
- Equities are in the red this Tuesday ahead of the US Fed meeting. Several trading desks are reporting some profit-taking ahead of a possible failure of the stopgap bill to avoid a US shutdown.
- The CME Group FedWatch Tool shows that markets are pricing in a 99% chance that the Federal Reserve will keep interest rates unchanged at its meeting in September. Traders though will need to watch out for any hawkish rhetoric from Powell as inflation has been ticking up recently.
- The benchmark 10-year US Treasury yield trades at 4.31% and peaked in early Monday trading before starting to sell off. A small flight to safe havens with US bonds being bought triggers a decline in yields.
US Dollar Index technical analysis: signals mixed
THe US Dollar was facing some selling pressure on Monday, which actually is not a bad thing as such. After a ninth consecutive week of gains for the US Dollar Index (DXY), the Relative Strength Index (RSI) is a fair bit into overbought territory. A few days of sideways to lower would help cool down the rally a bit before entering the next leg up, where the US Fed rate decision could act as a catalyst.
The US Dollar Index (DXY) has edged up, reaching 105.41. This is just a sigh away from the 2023 high near 105.88. Should the DXY be able to close above there for the week, expect the US Dollar to go even stronger in the medium-turn.
On the downside, the 104.44 level seen on August 25 kept the Index supported on Monday, halting the DXY from selling off any further. Should the uptick that started on September 12 reverse and 104.44 gives way, a substantial downturn could take place to 103.04, where the 200-day Simple Moving Average (SMA) comes into play for support.
Fed FAQs
What does the Federal Reserve do, how does it impact the US Dollar?
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.
How often does the Fed hold monetary policy meetings?
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.
What is Quantitative Easing (QE) and how does it impact USD?
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.
What is Quantitative Tightening (QT) and how does it impact 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.