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.
The US Dollar made it through a very difficult area on the US Dollar Index (DXY) chart. The region with both the 100-day and the 55-day Simple Moving Average (SMA) has been broken to the upside and must have hurt quite a few US Dollar bears in the process. With the US Dollar retracing a little bit on Wednesday, it will be important to see if the 100-day SMA at 102.31 will be able to refrain the DXY from paring back all gains from Tuesday.\xa0
On the downside, the US Dollar bulls will want to defend that earlier mentioned 100-day SMA at 102.31, in order to avoid a full paring back of earlier gains for this week. If bulls fail to do so, expect to see a nosedive move toward 102.00. The low of past Friday at 101.74 could be a line in the sand to predict if more downside is to come, once it is being tested.\xa0
On the economic front, a light release calendar is on the cards, with only the weekly Mortgage Applications numbers expected. From the commodity side, the US Energy Information Administration (EIA) will release Crude Oil and derivatives numbers. This release will get some additional attention as Western Texas Intermediate (WTI) crude price went on a wild ride on Tuesday, by first dropping 3.10% during the European session and then rallying 4% during the US trading session.
Daily digest: US Dollar in a state of nirvana
- Markets faced the first and only piece of macroeconomic data out of the US at 11:00 GMT with the weekly Mortgage Bankers Association (MBA) Mortgage Applications dropping to -3.1% from -3.0% previous week.\xa0
- The US Treasury Department is about to tap the markets for a 10-year note auction. As the 10-year tenor acts as an important benchmark, expect some additional attention to any bid/cover ratios and demanded yields.\xa0
- Expect a bit of fireworks from the US Energy Information Administration (EIA) Crude Oil numbers. Western Texas Intermediate (WTI) crude price moved over 7% in intraday volatility on Tuesday, and as recession fears are fading on Wednesday, a drop in stockpile could fuel a pop higher in the Crude Oil price.\xa0
- Stocks are rebounding a bit with the Hang Seng unchanged and European equities on the front foot. Both the German DAX and the European Stoxx 50 are paring back losses from Tuesday. US equity futures are in good shape to have a green Wall Street opening.
- The CME Group FedWatch Tool shows that markets are pricing in an 86.5% chance that the Federal Reserve will pause interest rate hikes at its meeting in September.\xa0
- The benchmark 10-year US Treasury bond yield trades at 4.01% and is trading higher after the drop below 4% intraday on Tuesday. The risk aversion from Tuesday seems to be in the rear mirror and US bonds are no longer heavily bid.\xa0
US Dollar Index technical analysis: bears and bulls looking at each other
