The US Dollar (USD) has gathered strength in the second half of the week and the US Dollar Index climbed above 102.00 for the first time in a week on Friday. The risk-averse market atmosphere helps the USD find demand as a safe haven while hawkish Federal Reserve (Fed) bets provide an additional boost to the currency.
Ahead of the weekend, the US Bureau of Economic Analysis (BEA) will release the Personal Consumption Expenditures (PCE) Price Index, the Fed’s preferred gauge of inflation, for March. Employment Cost Index data for the first quarter will also be watched closely by market participants.
Technical analysis: US Dollar Index techs point to a bullish tilt
The US Dollar Index (DXY) climbed above the 20-day Simple Moving Average (SMA), which is currently located near 101.80, for the first time in 10 days on Friday. Additionally, the Relative Strength Index (RSI) indicator on the daily chart rose to 50, reflecting the lack of seller interest.
In case the DXY manages to end the week above 101.80, it could stage an extended recovery toward 102.60 (static level) and 103.00 (50-day SMA, 100-day SMA).
If sellers defend 101.80 and don’t allow the index to hold above that level, additional losses toward 101.00/100.80 (psychological level, static level, multi-month low set on April 14) and 100.00 (psychological level) could be witnessed.
How does Fed’s policy impact US Dollar?
The US Federal Reserve (Fed) has two mandates: maximum employment and price stability. The Fed uses interest rates as the primary tool to reach its goals but has to find the right balance. If the Fed is concerned about inflation, it tightens its policy by raising the interest rate to increase the cost of borrowing and encourage saving. In that scenario, the US Dollar (USD) is likely to gain value due to decreasing money supply. On the other hand, the Fed could decide to loosen its policy via rate cuts if it’s concerned about a rising unemployment rate due to a slowdown in economic activity. Lower interest rates are likely to lead to a growth in investment and allow companies to hire more people. In that case, the USD is expected to lose value.
The Fed also uses quantitative tightening (QT) or quantitative easing (QE) to adjust the size of its balance sheet and steer the economy in the desired direction. QE refers to the Fed buying assets, such as government bonds, in the open market to spur growth and QT is exactly the opposite. QE is widely seen as a USD-negative central bank policy action and vice versa.