Forex Today: US Dollar collapses ahead of US Retail Sales, FOMC’s meeting

Here's what to watch on Tuesday, September 16:

The US Dollar Index (DXY), which tracks the buck’s value against six other currencies, tumbled 0.32% at 97.30, near eight-week lows. US Retail Sales are projected to slow in August, rising 0.3% MoM versus 0.5% previously, which may further pressure DXY downward. Other data expected is Industrial Production.

EUR/USD surged over 0.26%, above 1.1750, as market participants shrugged off Fitch downgrading France’s sovereign credit rating from AA- to A+ due to a political deadlock expected after elections. European Central Bank (ECB) member Isabel Schnabel commented that “interest rates are in a good place as inflation stabilizes around our 2% target, and the economy remains resilient at full employment.” Ahead on Tuesday, the docket will feature ECB’s Escriva speech, inflation in Italy, the ZEW Survey for September in Germany and the Eurozone, and Industrial Production for the whole bloc.

GBP/USD climbed above 1.3600 as traders await UK July jobs data, with the ILO Unemployment Rate expected to hold at 4.7%. Additionally, market players are eyeing the Bank of England (BoE) policy decision on Thursday.

USD/JPY traded lower as the US Dollar declined against most G10 currencies, while the Bank of Japan is expected to increase rates later this year. Japanese data due Tuesday: August Exports are forecast to improve to a -1.9% YoY contraction (from July’s -2.6%), while Imports are expected to decline -4.2% YoY, less than July’s -7.5% drop.

USD/CAD tumbled sharply over 0.49% down below 1.3800, as investors priced in the Fed cut and an uptick in inflation data from 1.7% to 2%, right at the Bank of Canada’s inflation target.

Gold prices continued to print record highs and seem poised to test $3,700 throughout the week as US Treasury yields reflect market players’ bets for a 25-bps rate cut by the US central bank. If XAU/USD retreats below $3,650, expect a drop toward $3,600. Otherwise, further Bullion’s upside is seen.

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.

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