US Dollar softens following PPI data and Powell's comments

Source Fxstreet
May 14, 2024 16:55
  • April’s US Producer Price Index prints higher monthly reading than expected.
  • Fed Chair Jerome Powell signals strong US economic outlook, which may delay interest rate cuts.
  • Markets await CPI data on Wednesday to continue placing their bets on the easing cycle of the Fed.

The US Dollar Index (DXY) is currently trading at around 105.35, displaying minimal losses. The US Producer Price Index (PPI) showed no surprise on the annual print, but monthly prices rose more than expected. Jerome Powell attached to the script given in the last Federal Reserve (Fed) decision that interest rates might have to be kept higher for longer but that cuts will eventually come and inflation will get back to target.

The US economy is displaying robust growth and persistent inflation, which is making the Fed remain cautious about cutting rates. On Wednesday, April’s Consumer Price Index (CPI) data will likely impact the expectations on the easing cycle, which is seen starting in September.

Daily digest market movers: DXY is mildly down as markets digest PPI data ahead of CPI

  • US Bureau of Labor Statistics revealed that the Producer Price Index (PPI) increased by 2.2% on a yearly basis in April. Annual core PPI and monthly core PPI both posted a rise of 2.4% and 0.5%, respectively, in line with March figures.
  • Both PPI and core PPI reported a 0.5% rise in April MoM.
  • The odds of a cut in June and July remain low as the best-case scenario for the markets at the moment is that the Fed will start cutting in September. A cut in November is fully priced in.

DXY technical analysis: DXY posts correctives but maintains bullish bias

On the daily chart, the Relative Strength Index (RSI) traces a negative slope in negative territory, which indicates that selling momentum is still present. In addition, the Moving Average Convergence Divergence (MACD) shows rising red bars, which demonstrates increasing bearish momentum in the short-term outlook.

That being said, the DXY’s position relative to its Simple Moving Averages (SMAs) paints a different picture. Currently, the index is below the 20-day SMA, showcasing the recent bearish control, but the fact that it is above the 100 and 200-day SMAs points out that the underpinning support from the bulls is not all lost.

 

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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