US Dollar trims losses after soft PPI readings, Red Sea tensions
- The DXY Index recovered toward 102.40 after falling close to 102.20.
- December PPIs came in lower than expected at 1.8% YoY.
- The US 2-year yield fell to lows not seen since May 2023.
The US Dollar (USD), as gauged by the DXY Index, has experienced downward pressure, trading as low as 102.20 amidst weak Producer Price Index (PPI) data from December but then recovered toward 102.40. Following the readings, US bond yields are declining, while dovish bets on the Federal Reserve (Fed) intensified.
The Fed's dovish stance, based on welcoming the cooling inflation and projecting no rate hikes in 2024, has recently weakened the USD and seems to be offsetting the resilience of the US economy while other economic blocks are weakening. Despite higher CPI numbers, the market remains stubborn and expects the Fed to initiate its easing cycle sooner rather than later, and the soft PPI readings gave markets a reason to bet on a less aggressive approach.
Daily digest market movers: US Dollar pressured down by soft PPI and falling US yields
- US Producer Price Index (PPI) for final demand rose by 1% on a yearly basis in December, slightly below market expectations of 1.3% and up from the revised 0.8% increase in November.
- The annual core PPI, which excludes volatile food and energy prices, increased by 1.8% in December, falling below both the November reading and analysts' estimates of 2% and 1.9%, respectively. The monthly core PPI remained unchanged for the third consecutive month.
- US bond yields are declining. The 2-year yield is currently at 4.13%, its lowest since May 2023, while the 5-year yield rests at 3.83% and the 10-year yield sits at 3.94%.
- The CME FedWatch Tool reveals no rate hike predictions for the January meeting. Instead, March and May 2024 meeting expectations indicate increased probabilities for rate cuts despite Thursday’s hot inflation reading for the CPI.
- The odds of a cut in March rose to 77%, while the odds of another one in May jumped to 70%.
- As tensions rise in the Red Sea between the US and Houthis rebels, the downside is limited for the index.
Technical Analysis: DXY index buyers hold their ground, indicators still in positive territory
The daily Relative Strength Index (RSI), which is currently flat and in positive territory, indicates that buyers have halted their momentum but still maintain control in the short run. Adding to this narrative of tentative bullish strength is the Moving Average Convergence Divergence (MACD). Despite being flat, it's displaying green bars that suggest buying pressure is maintaining a steady pace.
Meanwhile, when examining the Simple Moving Averages (SMAs) in the short-term, the buyer's strength is still in play, given that the pair is trading above the 20-day SMA. Nevertheless, trading under both the 100 and 200-day SMAs, a more significant time frame, indicates sellers hold the upper hand in the middle and long-term perspective.
Support levels: 102.15, 102.00 (20-day SMA), 101.80.
Resistance levels: 102.50, 102.70, 102.80.
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.
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