US Dollar weakens on Wednesday after cooling CPI
- USD marks a slight decline as lower US inflation further dulls its attractiveness.
- Softer but in-line CPI figures give markets reason to feed on dovish narrative.
- Markets still anticipate the first rate cut in September.
The US Dollar (USD), gauged by the US Dollar Index (DXY), showed a slight downtrend below the 103.00 threshold during Wednesday's trading session. This decrease follows the confirmation of cooler-than-expected inflation in the US, which somewhat overshadowed the stable outlook of the country's labor market.
While the market expectations regarding the upcoming decisions on monetary policy didn't change substantially, the projection of the US economic trend still points toward a growth rate above the trend. This pattern suggests that the market might again be overpricing the need for aggressive monetary easing in the future.
Daily digest market movers: Lower US inflation dampens US Dollar's appeal
- The decrease in US inflation, as gauged by the Consumer Price Index (CPI), was a main decider of the day's market dynamics.
- Headline CPI decelerated to 2.9% on a YoY basis in July from June's level of 3%, slightly below the market expectations.
- Core CPI (which excludes the fluctuating food and energy prices) stood at 3.2% YoY, an increase from 3.3% seen in July, aligning with the market predictions.
- The possibility of a cut by the Federal Reserve (Fed) in September stands at around 80%.
- These future easing probabilities will be highly dependent on other economic indicators.
DXY technical outlook: Bearish outlook steady, indicators deep in negative terrain
The technical indicators of DXY point to a persisting bearish market situation with buyers failing to generate a significant uptick. The index continues to anchor below the 20,100 and 200-day Simple Moving Averages (SMA), reinforcing the dominant bearish sentiment.
The Relative Strength Index (RSI), remains near 30, indicating steady selling pressure. On the other hand, the Moving Average Convergence Divergence (MACD) stabilizes, all the while remaining in negative territory with low, red bars.
Support Levels: 102.40, 102.20, 102.00
Resistance Levels: 103.00, 103.50, 104.00
US Dollar FAQs
The US Dollar (USD) is the official currency of the United States of America, and the ‘de facto’ currency of a significant number of other countries where it is found in circulation alongside local notes. It is the most heavily traded currency in the world, accounting for over 88% of all global foreign exchange turnover, or an average of $6.6 trillion in transactions per day, according to data from 2022. Following the second world war, the USD took over from the British Pound as the world’s reserve currency. For most of its history, the US Dollar was backed by Gold, until the Bretton Woods Agreement in 1971 when the Gold Standard went away.
The most important single factor impacting on the value of the US Dollar is monetary policy, which is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability (control inflation) and foster full employment. Its primary tool to achieve these two goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, the Fed will raise rates, which helps the USD value. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates, which weighs on the Greenback.
In extreme situations, the Federal Reserve can also print more Dollars and enact 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 when credit has dried up because banks will not lend to each other (out of the fear of counterparty default). It is a last resort when simply lowering interest rates is unlikely to achieve the necessary result. It was the Fed’s weapon of choice to combat the credit crunch that occurred during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy US government bonds predominantly from financial institutions. QE usually leads to a weaker US Dollar.
Quantitative tightening (QT) is the reverse process whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing in new purchases. It is usually positive for the US Dollar.
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