US Dollar recovers slightly after CPI-related fall as investors reprice chances of rate cuts

Source Fxstreet
May 16, 2024 10:30
  • The US Dollar faced a hefty correction on Wednesday after the US CPI print. 
  • Fed’s Kashkari pushed back against market anticipation of rate cuts, repeating that rates need to stay high for longer.
  • The US Dollar Index flirts with a 104.00 break to the downside.

The US Dollar (USD) is recovering a touch on Thursday from its depreciation after the latest Consumer Price Index (CPI) showed the disinflationary trend resumed in April. Pieces of the puzzle are starting to fall into place with the recent string of data pointing to some easing on all fronts in the economy, and the softer CPI was the cherry on the cake. Markets responded to evidence of declining inflation popping the champagne bottle, with the S&P 500 reaching new all time highs. 

However, Federal Reserve Bank of Chicago President Austan Goolsbee and Federal Reserve Bank of Minneapolis President Neel Kashkari called for keeping rates steady for a while longer, warning that market expectations about interest-rate cuts might swing too far. 

On the economic data front, Thursday’s calendar is full of releases, although lighter in terms of importance.  The weekly Initial Jobless Claims, the Philadelphia Fed Manufacturing Survey for May and the Industrial Production data will be the most important ones. On the latter, Japan and the Eurozone have recently reported positive industrial output , and a decline in US production might trigger another round of weakness for the Greenback. 

Daily digest market movers: More data to confirm

  • Kickoff this Thursday at 12:30 GMT with a batch of housing, employment and prices data:
    • Building Permits are expected to increase to 1.480 million in April from 1.467 million in March. 
    • Housing Starts are expected to increase to 1.420 million from 1.321 a month earlier.
    • Weekly Jobless Claims could gather more importance than usual after last week’s numbers came well above the consensus:
      • Initial Jobless Claims are expected to head to 220,000 from 213,000.
      • Continuing Claims expected to remain rather stable,to 1.780 million from 1.785 million.
    • The import/export Price Index for April will come in as well.
    • The Philadelphia Fed Manufacturing Survey for May is expected to fall to 8 in May from 15.5 in Apri. 
  • Markets can digest all the above data before a slew of Fed officials are set to take the stage:
    • Federal Reserve Vice Chair for Supervision Michael Barr will testify before the US Senate Committee on Banking. 
    • Federal Reserve Bank of Philadelphia President Patrick Harker will speak on the economic impact of higher education and health care.
    • Federal Reserve Bank of Cleveland President Loretta Mester will participate in a luncheon at the Wayne Economic Development Council.
    • Federal Reserve Bank of Atlanta President Raphael Bostic participates in a moderated conversation about the US economic outlook at an event organized by the Jacksonville Business Journal.
    • All speakers this Thursday are Federal Open Market Committee (FOMC) voters, except for Fed’s Harker. 
  • The Qatar World Economic Forum started on Tuesday morning. Headlines from world leaders may come out throughout the week.
  • Equities outperformed in the US, with the S&P 500 hitting a fresh all-time high which got taken over by Asian equities. European equities look sluggish, undergoing some profit taking, with US futures mildly in the green. 
  • The CME Fedwatch Tool suggests a 91.6% probability that June will still see no change to the Federal Reserve's fed fund rate. Odds have changed for September with the tool showing a 51.4% chance that rates will be 25 basis points lower than current levels.
  • The benchmark 10-year US Treasury Note trades around 4.34%, the lowest level for over a month.

US Dollar Index Technical Analysis: Watch out from here

The US Dollar Index (DXY) has taken out several important support in its downward trajectory on Wednesday. Although some support comes in, several rejection levels now can emerge and trigger another violent sell-off. A crucial level to keep an eye on is 103.83, the 55-week Simple Moving Average (SMA), because if it is broken it would open room for the DXY to sink to 100.00.

On the upside, several levels need to be regained again after Wednesday’s firm correction. The first is the 55-day SMA at 104.68, together with a pivotal level at 104.60. The next step up will be 105.12 and 105.52 in case the DXY has room to recover further. 

On the downside, the 100-day SMA around 104.11  is the last man standing to support the decline. Once that snaps, a bit of an air pocket is placed between 104.11 and 103.00. Should US Dollar outflows persist, the low of March at 102.35 and the low from January at 100.61 are levels to keep into consideration.  

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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