US Dollar steadies on quiet Monday ahead of US CPI data
- The US Dollar consolidates on Monday after whipsaw moves last week.
- The economic calendar is quiet on Monday ahead of a busy week ahead.
- The US Dollar Index trades around 105.30, in the middle of last week’s range.
The US Dollar (USD) is trading flat and quiet on Monday, with the DXY US Dollar Index right in the middle of last week’s range at 105.30. The week starts calm on the economic data front, but it will get busier as days go by with the release of the US Producer Price Index (PPI) numbers on Tuesday and the Consumer Price Index (CPI) data on Wednesday.
On Monday, two US Federal Reserve (Fed) members are set to take the stage: Federal Reserve Vice Chair Phillip Jefferson is set to deliver opening remarks and participate in a Q&A session at the Theory and Practice conference in Cleveland. Jefferson will be joined by Federal Reserve Bank of Cleveland President Loretta Mester in that same session. Both Fed speakers are voting members at the Federal Open Market Committee (FOMC) for this year.
Daily digest market movers: Dull Monday ahead
- A very quiet start to this week is expected. No real outliers to report on the quote board, besides the Czech Krona (USD/CZK), which is outperforming against the Greenback by nearly 0.50%.
- At 13:00 GMT, Fed Vice Chair Phillip Jefferson and Federal Reserve Bank of Cleveland President Loretta Mester will both participate in a Q&A session at the Theory and Practice conference in Cleveland.
- The US Treasury Department will auction a 3-month and a 6-month bill around 15:30 GMT.
- The equity markets started the week very mixed after the German Dax posted a fresh historic high on Friday. Investors seem to be keeping their powder dry for later this week.
- The CME Fedwatch Tool suggests a 96.5% probability that June will still see no change to the Federal Reserve's fed fund rate. Odds of a rate cut in July are also out of the cards, while for September the tool shows a 48.6% chance that rates will be 25 basis points lower than current levels.
- The benchmark 10-year US Treasury Note trades around 4.48%, around the lower range for this Monday after hitting 4.94% earlier.
US Dollar Index Technical Analysis: This was it, nothing to see here
The US Dollar Index (DXY) is entering a soft patch with the risk of easing a bit. Markets are considering three scenarios, two of which favoring a weaker Greenback. Traders will be looking closely at the incoming data to look for confirmation on either three.
The first two scenarios that lead to a softer US Dollar are stagflation or a pickup in disinflation. With stagflation, economic growth would start to deteriorate while inflation would remain elevated, putting the Fed on the spot of being unable to lower interest rates in order to soften the blow of the economic contraction. Meanwhile, a resumption of the disinflation trend might bring June back into play for a rate cut and trigger a soft landing. The only element that would see the US Dollar stronger would be if economic data outperforms while inflation remains elevated as well, as this scenario would open the door for further rate hikes.
On the upside, 105.52 (a pivotal level since April 11) needs to be recovered, ideally through a daily close above this level, before targeting the April 16 high at 106.52 for a third time. Further up and above the 107.00 round level, the DXY index could meet resistance at 107.35, the October 3 high.
On the downside, the 55-day and the 200-day Simple Moving Averages (SMAs) at 104.54 and 104.25, respectively, have already provided ample support. If those levels are unable to hold, the 100-day SMA near 103.89 is the next best candidate.
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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