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    US Dollar mixed ahead of US CPI print

    Source Fxstreet
    Jan 11, 2024 12:30
    • The US Dollar traders are in a very tight range ahead of Thursday’s main event.
    • Traders face volatility near 13:30 GMT in a massive data dump. 
    • The US Dollar Index remains above 102.00, though bets are on for substantial weakness.

    The US Dollar (USD) is holding its head above 102 for now, though traders and markets are shouting that it will sink lower this Thursday. The long-awaited US inflation report will be released in the form of the Consumer Price Index (CPI) numbers. Expectations are overall that it will come out lower, with several analysts pointing to the contraction in Purchase Managers Indices in recent weeks and Crude Oil prices trading in a lower range as factors. 

    Additionally, traders will need to pluck their way through the other data points that will be released near 13:30 GMT. The weekly Jobless Claims numbers are due to be released, and could either counterweigh or accelerate any moves on the back of the US inflation outcome. Expect a volatile ride from 13:30 into the start of the US opening bell. 

    Daily digest market movers: CPI talk of the town

    • Fireworks expected near 13:30 GMT:
      • US Consumer Price Index:
        • Monthly Headline CPI is expected to head from 0.1% to 0.2%. Economists' estimates range from 0.1% to 0.4%.
        • Yearly Headline CPI is foreseen to head from 3.1% to 3.2%. Economists' estimates range from 3.1% to 3.6%.
        • Monthly Core CPI is to stay steady at 0.3%. Economists' estimates range from 0.1% to 0.3%.
        • Yearly Core CPI is foreseen to head from 4% to 3.8%. Economists' estimates range from 3.7% to 4.0%.
        • Any print below the lowest estimates will trigger substantial US Dollar weakness, while any surprise beat above the highest estimate will trigger US Dollar strength. 
      • Jobless Claims release:
        • Initial Jobless Claims is expected to pick up from 202,000 to 210,000.
        • Continuing Claims are seen heading from 1,855 million to 1,871 million. 
    • Equity markets are roaring ahead of the US CPI print. With market expectations going all-in on a further decline of inflation numbers, triggering a call for a quicker US Federal Reserve rate cut, investors are forecasting a goldilocks scenario for the stock markets. Asian indices are all up over 1%. Europe is following suit with gains near 0.50%. 
    • The CME Group’s FedWatch Tool shows that markets are pricing in a 97.4% chance that the Federal Reserve will keep interest rates unchanged at its January 31 meeting. Around 2.6% expect the first cut already to take place. 
    • The benchmark 10-year US Treasury Note holds near 3.99%, and could sink lower if this Thursday’s CPI report points to further disinflation.

    US Dollar Index Technical Analysis: Expectations are high

    The US Dollar is expected to sink lower according to market participants. Proof is in the pudding with the US Fed futures pointing to rate cuts from the Fed as soon as May. Confirmation of this projection wil come with the US inflation numbers this Thursday. If they decline lower, that rate cut timing might even be moved forward to March, which would mean substantial US Dollar weakness ahead. 

    The first level on the upside to watch is 103.00, which falls nearly in line with the trend line from the top of October 3 and December 8. If broken and closed above, the 200-day Simple Moving Average (SMA) at 103.43 comes into play. The 104.00 level might be too far off, with 103.78 (55-day SMA) coming in as the next resistance.   

    To the downside, a rejection by the descending trendline will give fuel to Greenback bears leading to a further downturn. The line in the sand here is 101.74, the floor which held halfway through December before breaking down in the last two weeks. In case the DXY snaps this level, expect to see a test at the low near 100.80.

    US Dollar FAQs

    What is the US Dollar?

    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.

    How do the decisions of the Federal Reserve impact the US Dollar?

    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.

    What is Quantitative Easing and how does it influence the US Dollar?

    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.

    What is Quantitative Tightening and how does it influence the 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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