Home Forex The US dollar retreats as traders take profit in the wake of PCE and the durable data dump

The US dollar retreats as traders take profit in the wake of PCE and the durable data dump

by SuperiorInvest


  • The US dollar is slightly lower against most G7 pairs after a big rally this week, ahead of a slew of macroeconomic data this Friday.
  • US debt ceiling talks continue into Friday, Biden hints at possible spending freeze and denies default.
  • The US Dollar Index clears 104 and retreats to 103.85 as it awaits US macroeconomic data to decide whether to break lower or head another leg higher.

The American dollar (USD) eased slightly on Friday under some profit-taking after its gains this week, as traders hear signals from Washington on the debt ceiling debate and plenty of US data set to hit this Friday. The US debt ceiling continues to make headlines, with more details being released about a possible deal, albeit a deal this week seems almost impossible. US President Joe Biden provided further details of the talks on Thursday night and reiterated that there would be no failure on his watch.

On the macroeconomic data front, a big batch of important data is about to hit the markets. At 12:30 GMT, the Fed’s preferred inflation metric is released – PCE (Personal Consumption Expenditure) inflation numbers, both core and overall for monthly and annual performance. These numbers have the potential to shift market expectations for the Federal Reserve’s next interest rate decisions in June and July, and are thus an important market driver for US dollar traders.

Data on personal spending and income, along with data on durable goods orders and inventory, will appear at the same time. To round out the batch of macroeconomic data for the US, the University of Michigan is set to release its May final readings for consumer sentiment and inflation expectations. These numbers could help round out movements in the US dollar, Treasury yields and other assets.

Daily Roundup: US dollar sees some profit-taking as debt ceiling proposal emerges

  • US stock futures are slightly in the green after a subdued start this Friday, while China’s Hang Seng closed nearly 2% lower and sees Europe still looking for direction.
  • The CME Group FedWatch Tool shows that markets are counting on a 73% chance of a rate hike for July, and even June is now a 33% chance of a hike. A big shift is seen in September expectations: Expectations for a rate cut changed to a 52% chance of a rate hike. Data out this Friday could block that rate hike for July and see a more than 50% chance of rate hikes in June and September.
  • US President Joe Biden noted after the latest debt ceiling talks that a proposal to freeze spending for two years was on the table and reiterated that there would be no delay. Meanwhile, GOP debt negotiators backed down on demands for defense spending.
  • Negotiator Garret Graves said finding a deal on debt relief this Friday would be difficult.
  • US credit default swaps (CDS) eased to 163.875 after Thursday’s high of 165.83. The peak was last week on Monday at 177.62 when default fears were at their highest.
  • Fitch Puts Fannie Mae and Freddie Mac Ratings on Watch
  • The US Treasury’s cash balance fell to $49.5 billion on Wednesday.
  • The yield on the benchmark 10-year US Treasury bond is trading at 3.79%, holding that level after briefly reaching 3.82%, pending further guidance from data later this Friday.

US Dollar Index Technical Analysis: USD slips below 104 on US data

The US Dollar Index (DXY) has cleared the 55-day and 100-day simple moving averages (SMA) at 102.43 and 102.85 to the upside. The safe haven status of the US dollar continues to see bids for the DXY, with 104 broken early Thursday and now easing as the debt ceiling deal takes shape.

Upside, 105.73 (200-day SMA) still acts as a long-term price target to reach, as the next key upside level for the US Dollar Index is at 104.00 (psychological, static level) and acts as an intermediary to cross the open space.

On the downside, 102.85 (100-day SMA) settles as the first support level confirming a trend reversal. In case it breaks down, watch DXY react to the 55-day SMA at 102.48 to gauge further downside or upside.

Frequently asked questions about federal reservations

What is the Federal Reserve doing, how does it affect the US dollar?

Monetary policy in the US is shaped by the Federal Reserve System (Fed). The Fed has two mandates: to achieve price stability and to promote full employment. Its primary tool to achieve these goals is the adjustment of interest rates.
When prices rise too fast and inflation is above the Fed’s 2% target, it raises interest rates, which raises 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 can cut interest rates to encourage lending, which weighs on the dollar.

How often does the Fed hold monetary policy meetings?

The Federal Reserve (Fed) holds eight policy meetings a year, at which the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions.
The FOMC consists of twelve Fed officials—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 affect the USD?

In extreme situations, the Federal Reserve may resort to quantitative easing (QE) policy. QE is the process by which the Fed substantially increases the flow of credit in a troubled financial system.
It is a non-standard policy measure used during crises or extremely low inflation. It was the Fed’s weapon during the Great Financial Crisis of 2008. It involves the Fed printing more dollars and using them to buy high-quality bonds from financial institutions. QE usually weakens the US dollar.

What is quantitative tightening (QT) and how does it affect the US dollar?

Quantitative tightening (QT) is the reverse process of QE, where the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal of bonds it holds maturing into buying new bonds. It is usually positive for the value of the US dollar.

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