US Dollar battle to regain is crow: Does it all depend on the Fed?

• 
  The
  US
  Dollar
  Index
  has
  been
  confined
  to
  a
  well-limited
  range
  since
  the
  year
  started.
• 
  The
  Federal
  Reserve
  has
  the
  power
  to
  direct
  the
  USD’s
  direction
  but
  will
  not
  use
  it
  just
  yet.
• 
  The
  case
  of
  a
  USD
  steeper
  decline
  remains
  out
  of
  the
  picture
  regardless
  of
  Fed’s
  decisions.

The
world’s
leading
currency
has
been
struggling
to
regain
its
crow
throughout
the
first
half
of
the
year,
as
optimism
about
the
Federal
Reserve
(Fed)
delivering
three
rate
cuts
and
leading
the
way
on
monetary
loosening
diluted
as
time
passed.

In
fact,
the
second
half
of
the
year
started
with
Canada
and
several
European
central
banks,
including
the
European
Central
Bank
(ECB),
having
already
delivered
interest
rate
cuts,
while
the
Fed
sat
on
its
hands
and
gave
no
signs
of
abandoning
the
tight
monetary
path.

The
US
Dollar
Index,
a
measure
of
the
value
of
the
US
Dollar
relative
to
a
basket
of
foreign
currencies,
has
traded
between
102.00
and
106.00
since
early
January.
It
came
down
from
a
peak
at
112.17
posted
in
September
2022
and
fell
towards
the
99.00
level
in
July
2023,
when
the
market
began
foreseeing
the
end
of
the
tightening
cycle.

But
is
it
all
about
the
Fed?

According
to
the
US
Bureau
of
Labour
Statistics,
the

United
States
(US)
real
Gross
Domestic
Product
(GDP)
increased
at
an
annual
rate
of
1.4%
in
the
first
quarter
of
2024.

The
figure
indicated
a
deceleration
in
economic
growth,
primarily
attributed
to
“decelerations
in
consumer
spending,
exports,
and
state
and
local
government
spending,
and
a
downturn
in
federal
government
spending,”
according
to
the
official
report.
However,
the
economic
expansion
continues
regardless
of
the
pace,
and
the
recession’s
ghost
has
been
long
spooked
away.

Meanwhile,
inflation,
as
measured
by
the
Personal
Consumption
Expenditures
(PCE)
Price
Index,
edged
lower
to
2.6%
YoY
in
May
from
2.7%
in
the
previous
month.
The
core
annual
reading
printed
at
2.6%,
easing
from
the
2.8%
recorded
in
April.
While
it
remains
above
the
Fed’s
2%
goal,
inflation
has
resumed
its
decline
after
some
unfriendly
readings
in
the
first
quarter
of
the
year.

Finally,
a
healthy
labor
market
seems
to
have
found
its
balance.
Job
creation
continues
while
the
unemployment
rate
stands
at
4.1%,
and
wage
inflation
is
also
receding.

It
is
worth
remembering
that
the

Federal
Reserve
has
the
dual
mandate
of
promoting
maximum
employment
and
stable
prices.
It
has
never
been
closer
to
such
goals
since
before
the
coronavirus
pandemic.

Then,
what
is
halting
the
Fed
from
moving
forward
with
rate
cuts?

Fed
policymakers
started
the
year
anticipating
three
potential
rate
cuts
in
2024,
but
the
uptick
in
inflation
in
the
first
quarter
of
the
year
cooled
down
such
expectations.
A
stubbornly
tight
labor
market
added
to
the
negative
outcome
of
the
equation.
By
May,
financial
markets
reduced
hopes
to
just
one
cut
in
2024,
with
the
focus
currently
on
November
as
a
potential
date
for
the
first
25
basis
points
(bps)
reduction.

The
economy
is
moving
in
the
right
direction
but
has
not
yet
reached
the
finish
line.
In
such
a
scenario,
policymakers
refuse
to
move
forward
and
risk
inflation
resuming
its
upward
trend.
Yet,
at
the
same
time,
market
players
refuse
to
drop
hopes
of
easing
interest
rates.
As
a
result,
the
US
Dollar
keeps
trading
in
limbo.

US
Dollar’s
destiny
explained

Generally
speaking,
solid
economic
developments
are
reflected
by
a
stronger
currency.
Rate
cuts,
however,
have
the
opposite
result,
with
the
currency
depreciating
as
rates
drop.
But
would
that
be
the
case?

The
best
example
may
come
from
the
Euro,
which
barely
shed
ground
vs
the
USD
when
the

ECB
announced
the
first
interest
rate
trim.
The
world
is
in
a
different
scenario,
and
whatever
happened
in
the
past
won’t
grant
a
similar
outcome
in
the
future.
The
USD
may
actually
appreciate
after
the
initial
reaction,
as
the
overall
economic
performance
will
prevail.

One
word
of
warning:
not
one
nor
two
rate
cuts
will
be
enough
to
ease
the
burden
on
US
consumers.
Record
mortgage
rates
were
one
of
the
main
factors
before
the
economic
slowdown.
The
Fed
can
easily
deliver
up
to
three
rate
cuts
without
actually
accelerating
the
economy
to
the
point
it
may
start
generating
inflation.

The
US
Dollar
Index
shows
no
signs
of
leaving
the
102.00
–
106.00
range,
which
most
likely
will
depend
on
what
the
market
believes
on
rate
cuts.
A
bullish
breakout
should
expose
the
107.35,
the
September
2023
monthly
high,
which,
at
this
point,
seems
the
most
likely
scenario.
A
side
below
102.00
seems
too
far
away
at
this
point.
Interim
support
is
found
at
104.00
and
103.15,
while
hell
should
break
loose
for
the
US
Dollar
Index
to
pierce
the
102.00
level,
a
scenario
not
supported
by
the
US
economic
situation.