US Dollar holds above 105.00 as tensions build towards CPI release

Source Fxstreet
May 14, 2024 11:45
  • The US Dollar consolidates in a very narrow range.
  • The economic calendar picks up with US PPI and Fed speakers ahead.
  • The US Dollar Index hovers around 105.25, above 105.00.

The US Dollar (USD) is not making any big waves on Tuesday after a rather dull Monday. The only main takeaway were comments from Federal Reserve (Fed) Vice Chair Philip Jefferson, who said that rates need to stay higher for longer. All eyes will be on Fed Chairman Jerome Powell to hear if he supports that view and pushes back against any early initial rate cut forecasts. 

On the economic front, a lot of data to dive into with the Producer Price Index (PPI) measures as the biggest element on the table. The monthly movements in the headline and the core will be the most market-moving elements as an increase in both indices would ripple through into a higher Consumer Price Index (CPI) in the coming months. Higher costs for producers often mean higher prices for the end-consumer. 

Daily digest market movers: PPI ahead of CPI

  • The Qatar World Economic Forum started on Tuesday morning. Headlines from world leaders may come out throughout the week.
  • The US Small-Business Optimism Index for April from the National Federation of Independent Business came in at 89.7 from 88.5 in March.
  • At 12:30 GMT, the final reading for the Producer Price Index for April will be released:
  • Monthly headline PPI is expected to head to 0.3% from 0.2%.
  • Yearly headline PPI expected to accelerate to 2.2% from 2.1%.
  • Monthly core PPI should remain stable at 0.2%.
  • Yearly core PPI should remain stable as well at 2.4%.
  • The US Redbook for the week ending May 10 should be released around 12:55 GMT. The previous number was at 6%.
  • Two Fed speakers on the docket this Tuesday:
    • Voting Federal Reserve Governor Lisa Cook wil speak about economic growth around 13:10 GMT.
    • Federal Reserve Chairman Jerome Powell participates in a moderated discussion with the Dutch central bank Governor Klaas Knot in Amsterdam around 14:00 GMT. 
  • European equities have taken over the negative tone at the US closing bell from Monday and are trading in the red. US equity futures are trading flat. 
  • The CME Fedwatch Tool suggests a 91.1% 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 49% chance that rates will be 25 basis points lower than current levels.
  • The benchmark 10-year US Treasury Note trades around 4.47%, around the lower range for this week after hitting 4.94% earlier. 

US Dollar Index Technical Analysis: PPI not to move the needle

The US Dollar Index (DXY) trades quite stable above 105.00, though it is a bit afloat. Traders are clearly looking for direction or confirmation on what to do next for the Greenback. Rather Fed Chairman Jerome Powell or the Consumer Price Index print on Wednesday will be better moments to see where the DXY will be heading.

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.

 

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