US Dollar sideways ahead of US CPI, Fed decision

Source Fxstreet
Jun 12, 2024 10:45
  • The US Dollar trades mixed on Wednesday, nearly flat against its most major peers. 
  • Traders are on edge over upcoming US CPI release for May and the Fed interest rate decision. 
  • The US Dollar index trades comfortably above 105.00 and is set to face some volatility. 

The US Dollar (USD) trades nearly flat in Wednesday’s European session and holds above the 105.00 level ahead of two key economic events: the US Consumer Price Index (CPI) release for May and the US Federal Reserve (Fed) interest rate decision. Meanwhile, in the runup to the US data, markets can digest and let the dust settle over the turmoil in Europe and its recent election results. 

On the economic front, market expectations for the monthly core CPI are very narrow, from a low estimate of 0.2% to a high estimate of 0.3%. Headline CPI is expected to range between 0.1% and 0.2%. Should the actual CPI number fall below the lowest expectation or come out above the highest, expect some substantial movements in the US Dollar Index (DXY). 

Daily digest market movers: CPI as appetiser ahead of the Fed

  • At 11:00 GMT, the Mortgage Bankers Association (MBA) releases the Mortgage Applications number for the week ending on June 7. The previous week, a notable decline of 5.2% was printed, with no expectations available. 
  • At 12:30 GMT, the US Bureau of Labor Statistics will release the US Consumer Price Index for May:
    • Monthly core inflation is expected to increase steadily by 0.3%.
    • Monthly headline inflation is seen rising by 0.1% from the 0.3% increase in April.
    • Yearly core inflation is expected to soften a touch to 3.5% from 3.6% in April.
    • Yearly headline inflation should remain stable at 3.4%.
  • Markets will digest the CPI release until 18:00 GMT, when the US Federal Open Market Committee (FOMC) will release its statement on the Federal Reserve’s interest rate decision. As markets have fully priced in an unchanged rate at 5.50%, the dot plot, where all Fed officials get to pencil in their projections and forecasts on how they see monetary policy going forward, will be more important. 
  • At 18:30 GMT, Fed Chairman Jerome Powell will take the stage and deliver a speech with questions and answers on the recent monetary policy decision. 
  • Asian equities are in the red across Japan and China. Europe seems to be snapping the losing sentiment and trades in the green, as the US futures. 
  • The CME FedWatch Tool shows a 47.4% chance of Fed interest rate at the current level in September. Odds for a 25 basic points rate cut stand at 48.3%, while a very slim 4.3% chance is priced in a 50 basic points rate cut
  • The benchmark 10-year US Treasury Note slides to the lowest level for this week, near 4.4%, and flirts with further declines. 

US Dollar index Technical Analysis: Here come the fireworks

The US Dollar index (DXY) is set to either trade another leg higher or to erase all weekly gains with the US CPI and Fed decision as main drivers on Wednesday. Although, one scenario might be playing out which would result in an actual standstill for the US Dollar. That would be if the disinflation is still on track with CPI coming in softer than expected, being contradicted later on with the Fed rate decision where Fed Chairman Jerome Powell could turn hawkish and say that the Fed will need to stay steady for longer in order to really get inflation where they want it to be.  

On the upside, there are some technical or pivotal levels to watch out for. The first is 105.52, a level that held support during most of April. The next level to watch is 105.88, which triggered a rejection at the start of May and will likely play its role as resistance again. Further up, the biggest challenge remains at 106.51, the year-to-date high from April 16. 

On the downside, a trifecta of Simple Moving Averages (SMA) is now playing as support. First, and very close, is the 55-day SMA at 105.07. A touch lower, near 104.48, both the 100-day and the 200-day SMA are forming a double layer of protection to support any declines in the US Dollar index. Should this area be broken down, look for 104.00 to salvage the situation. 

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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