US Dollar devaluation means fuel for the stock market rally


US Dollar tries to snap losing streak as Greenback trades in the green.
All eyes on Michigan Consumer Sentiment to see if the US Dollar can close this week off the lows.
The US Dollar Index consolidates below 100.00, a weekly close above there would offer relief.

The US Dollar (USD) is trying to claw back at the end of a hectic week where the Greenback was unable to catch a breather during the relentless selling waves. At one point it appeared that everything was against the USD, with several inverse correlations kicking into gear. Most notable element is that the stock market has rallied throughout the week which puts a goldilocks scenario on the table where US rates will keep abating, stocks keep rallying and the Greenback will be left behind paying the bill for it all by devaluing even more. 

On the economic front, just one really important element to look for which could make or break the small recovery seen in the US Dollar in the European trading session. The University of Michigan Consumer Sentiment could either offer some relief or trigger another round of US Dollar selling and could push the US Dollar Index further below 100.00, making it the worst week since November 2022. The inflation expectations component in the Michigan survey will be crucial as a possible catalyst. 

Daily digest: US Dollar abating feeds inflow in risk assets

Early on Friday, Christopher Waller from the Federal Reserve Board of Governors reiterated that the Fed needs to keep on fighting inflation and needs to keep policy restrictive for some time. 
The Japanese Yen deserves a moment in the spotlight as the Japanese tiger roars back by hitting an eight-week high against the Greenback.
At 14:00 GMT, the only important datapoint for this Friday to keep an eye on as the Michigan Consumer Sentiment Index for July will be published. The index itself is expected to rise from 64.4 to 65.5. As such, that number should not have that much market-moving effect. Traders will rather look for the inflation expectations on both short and long term to be more impactful for the US Dollar Index to move higher or to make a new low for this week.
Equities across the globe are taking it easy this Friday with some very mild losses at -0.17% for the Japanese Topix and the Chinese Hang Seng closed at +0.33%. For the latter, some negative news came as China vows to only provide support packages for specific segments and in the global economy, but no real large support package or quantitative easing is to be in place.
European and US equity futures are flat for this Friday halfway through the European session. Although the goldilocks scenario might be the talk of the town, the earnings season could throw a spanner in the works for that straight line up to a new all time high. 
The CME Group FedWatch Tool shows that markets are pricing in a 94.9% chance of a 25 basis points (bps) interest-rate hike on July 26. A second rate hike looks to be out of the question judged on the very low percentages that scenario receives for the last Fed meetings later this year. 
The benchmark 10-year US Treasury bond yield trades at 3.78% and is continuing its relentless slide lower from 4.09% last week. Traders are going all-in on the goldilocks scenario where the Fed is done hiking and might even cut rates earlier as foreseen, which would see a massive boom in the economy and stock market.  

US Dollar Index technical analysis: long road to recovery

The US Dollar is having its worst week since its sharp correction in November last year as the Greenback is starting to bottoming out halfway through the European trading session. With substantial losses against the Japanese Yen (USD/JPY), Euro (EUR/USD) and Swiss Franc (USD/CHF), the US Dollar Index has lost nearly 2.5% of its value this week. As the DXY has retreated below 100.00, a weekly close above the big figure could spark hopes for the Greenback to still be able to pair back some of the losses. 

In such an upside case, look for 102.73 to provide resistance at the 55-day Simple Moving Average (SMA) that will partially re-gain its importance after having been chopped up that much a few weeks ago. Only a few inches above the 55-day SMA, the 100-day SMA comes in at 102.82 and could create a firm area of resistance in between both moving averages. In case the DXY makes its way through that region, the high of July at 103.57 will be the level to watch for a further breakout. 

On the downside, the US Dollar bears will look to take price action toward 99.42 as the next important technical support and once tested, that would mean a new 18-month low for the DXY. Just below there, on the weekly chart, we can find the 200-day SMA at 98.25, which is the next vital level to halt any selloffs. Although the price action resides below 100.00, a small turnaround could still be in the cards. 


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.

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