US Dollar rallies following hot CPI data, surge in Treasury yields

Source Fxstreet
Apr 10, 2024 16:40
  • Inflation measured by the CPI in the US accelerated in March.
  • Following the hot figures, the odds of a rate cut in June plummeted.
  • Hawkish bets on Fed, soaring US Treasury yields benefit USD.

The US Dollar Index (DXY) rallied to 105.20, up by nearly 1%, on Wednesday. The Greenback gained strength on hot inflation figures in the US Consumer Price Index (CPI) for March, which made markets start giving up hope for a June rate cut by the Federal Reserve (Fed).

Following a blockbuster labor market report and hot inflation figures for March, Fed officials may start signaling that they require additional evidence of the economy cooling down. In that sense, US Treasury yields may continue rising, which will benefit the USD.

Daily digest market movers: DXY gains strength on rising inflation figures, hawkish Fed bets

 

  • March CPI showed that headline inflation increased to 3.5% YoY in March, up from 3.2% in February and beating the 3.4% expected.
  • The Core CPI measurement, excluding volatile food and energy costs, reflected February's increase with an annual rise of 3.8% in March. Both the headline and core CPI experienced a 0.4% MoM rise, beating analyst estimates of 0.3%. 
  • The odds of a Fed cut in June plummeted to 20%.
  • US Treasury bond yields rallied with the 2-year yield at 4.93%, the 5-year yield at 4.56%, and the 10-year yield at 4.51%. All three yields rose more than 2%.

DXY technical analysis: DXY bulls step in and recover ground

The technical indicators on the daily chart reflect that the buyers are gaining momentum. The Relative Strength Index (RSI) is on a positive slope, well within positive territory, which hints at underlying bullish strength. The Moving Average Convergence Divergence (MACD) follows suit with rising green bars, further validating the positive sentiment hovering over DXY. 

Focusing on the Simple Moving Averages (SMAs), the DXY continues to be stationed above its 20, 100 and 200-day SMAs. This essentially suggests a higher ground captured by the bulls against the bears and adds weight to an overall positive prospect. 

 

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.

 

Disclaimer: For information purposes only. Past performance is not indicative of future results.
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