US Dollar rises modestly despite disappointing US housing data


US Dollar gathers strength against its major rivals midweek.
US Dollar Index stays in positive territory above 100.00 in the American session.
US housing data missed expectations but failed to trigger a market reaction.

The US Dollar (USD) started to outperform its rivals on Wednesday in the US Dollar Index (DXY), which tracks the USD’s valuation against a basket of six major currencies, holding in positive territory above 100.00 in the American session.

The USD managed to capture capital outflows out of Pound Sterling early Wednesday after data from the UK showed that inflation softened at a faster pace than expected in June. Moreover, the sharp upsurge seen in the USD/JPY pair following Bank of Japan (BoJ) Governor Kazuo Ueda’s dovish comments highlights strengthening demand for the USD.

The monthly data published by the US Census Bureau revealed on Wednesday that Housing Starts declined 8% on a monthly basis in June, following the 15.7% increase (revised from +21.7%) recorded in May. In the same period, Building Permits fell 3.7%, down sharply from May’s 5.6% increase. Despite the disappointing data, the USD clings to daily gains. 

Daily digest market movers: US Dollar shows signs of life

Retail Sales in the US rose 0.2% in June to $689.5 billion, the US Census Bureau reported on Tuesday. The 0.3% increase recorded in May had been forecast to reach 0.5%, but the data came in far below. Retail Sales Ex-Autos increased 0.2% in the same period, coming in slightly below the market expectation of 0.3%. 
Industrial Production in the US contracted 0.5% for the second straight month in June, the US Federal Reserve’s monthly publication revealed on Tuesday.
The annual Consumer Price Index in the UK rose 7.9% in June, down sharply from the 8.7% increase recorded in May. Following the inflation data, markets are leaning toward a 25-basis-point rate hike by the Bank of England (BoE) in August.
While speaking at the G20 meeting in India on Tuesday, BoJ Governor Ueda said that there was still some distance to sustainably achieve the 2% inflation target. “Unless our assumption on need to sustainably achieve 2% target changes, our narrative on monetary policy won’t change,” Ueda said, causing the Japanese Yen to lose interest.
Wall Street’s main indexes closed in positive territory on Tuesday. US stock index futures trade modestly higher on the day as investors await earnings figures from big tech firms.
The benchmark 10-year US Treasury bond yield stays on the back foot below 3.8% on Wednesday.
China’s real Gross Domestic Product (GDP) expanded 6.3% in the second quarter on an annualized basis, according to data released by China’s National Bureau of Statistics (NBS) early Monday. This reading followed the 4.5% growth recorded in the first quarter but came in below the market expectation of 7.3%. Citigroup lowered its full-year growth forecast for China to 5% from 5.5%.
US Treasury Secretary Janet Yellen told Bloomberg on Monday that there is a good chance that the Biden administration will go ahead with outbound investment controls on China.
The US Dollar weakened significantly last week as soft inflation data from the US revived expectations about the Federal Reserve reaching the terminal rate with a 25-basis-point (bps) rate hike in July.
The Consumer Price Index (CPI) in the US rose 3% on a yearly basis in June, following the 4% increase recorded in May. The annual Producer Price Index (PPI) edged 0.1% higher in the same period.
Commenting on the USD’s outlook: “In case of an increasingly rapid fall in inflation and weakening economic data, the market might increasingly rely on key rates not remaining at high levels for a long time, whereas rate cuts before the end of the year are becoming increasingly likely,” said Antje Praefcke, FX Analyst at Commerzbank. “That would cause the USD to ease further.” 
The University of Michigan reported on Friday that the Consumer Sentiment Index improved to 72.6 in July’s flash estimate from 64.4 in June.
Markets are nearly fully pricing in a 25 bps Fed rate increase in July. The probability of one more rate hike in December stands at around 20%, according to the CME Group’s FedWatch Tool.

Technical analysis: US Dollar Index looks to extend correction

The Relative Strength Index (RSI) indicator on the daily chart rose above 30 on Wednesday, suggesting that the US Dollar Index (DXY) started to correct the oversold conditions. 101.00 (former support, static level) could be seen as the next recovery target ahead of 101.50 (static level) and 101.90 (20-day Simple Moving Average).

On the downside, critical support is located at 100.00 (psychological level). If DXY fails to make a daily close above that level, buyers could refrain from betting on a steady rebound. In that case, 99.20 (static level from March 2022) aligns as next support before 99.00 (psychological level) and 98.30 (200-week Simple Moving Average).

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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