Forex Today: US Dollar stabilizes after Powell-inspired selloff

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Here is what you need to know on Monday, August 25:

The US Dollar (USD) holds its ground early Monday but finds it difficult to gather recovery momentum following the intense selloff seen in the American session on Friday. Later in the day, Chicago Fed National Activity Index and New Home Sales data for July will be featured in the US economic calendar. Additionally, the Federal Reserve Bank of Dallas will publish the Texas Manufacturing Survey for August.

While delivering a speech on “Economic Outlook and Framework Review” at the annual Jackson Hole Economic Symposium on Friday, Fed Chair Jerome Powell said that they will adopt a new policy framework of flexible inflation targeting and eliminate 'makeup' strategy for inflation. Powell acknowledged that downside risks to the labor market were rising, while noting that it would be reasonable to expect that inflation effects of tariffs will be short-lived. These comments triggered a USD selloff heading into the weekend and the USD Index fell nearly 1% on the day, erasing all of its weekly gains in the process. In the meantime, Wall Street's main indexes rose more than 1% on Friday. US stock index futures were last seen losing between 0.1% and 0.2%.

EUR/USD rose sharply on Friday and closed the week marginally higher. The pair stays in a consolidation phase above 1.1700 in the European morning on Monday. IFO - Current Assessment and Business Climate data from Germany will be watched closely by market participants.

GBP/USD gained more than 0.8% on Friday and snapped a four-day losing streak. The pair stays relatively quiet and fluctuates above 1.3500 in the European session.

USD/JPY corrects higher and trades above 147.00 after losing about 1% on Friday. The data from Japan showed that the Leading Economic Index declined to 105.6 in June from 106.1 in May.

After spending the majority of the week below $3,350, Gold gathered bullish momentum on Friday and climbed to a two-week-high above $3,370. XAU/USD fluctuates in a narrow channel early Monday and holds comfortably above $3,360.

Fed FAQs

What does the Federal Reserve do, how does it impact the US Dollar?

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.

How often does the Fed hold monetary policy meetings?

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.

What is Quantitative Easing (QE) and how does it impact USD?

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.

What is Quantitative Tightening (QT) and how does it impact 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.