US Dollar plunges following soft CPI, markets await FOMC clues

Source Fxstreet
Jun 12, 2024 16:43
  • USD pauses uptrend after the release of soft US inflation.
  • Greenback to rely on FOMC meeting to dictate its next move.
  • Investors expect hawkish hold with US central bank keeping rates at 5.25-5.50% range.

On Wednesday, the US Dollar Index (DXY) saw a downward trend following the release of US Consumer Price Index (CPI) data and ahead of the Federal Reserve’s (Fed) Federal Open Market Committee (FOMC) decision.

The two-day FOMC meeting, which ends on Wednesday, is a pivotal point for market observers as they will get a clearer outlook on the latest data, which saw inflation softening despite a strong labor market.

Daily digest market movers: DXY absorbs hit on CPI reading, eyes turn to FOMC

  • US Bureau of Labor Statistics (BLS) reports a decline in US CPI to 3.3% YoY in May, down from 3.4% in April and slightly below market expectation of 3.4%.
  • Annual core CPI rose 3.4%, marking a decrease from April's 3.6% and falling below analysts' estimate of 3.5%.
  • Markets expect a hawkish hold from the Fed, maintaining the stance that was portrayed before Wednesday's inflation data was released.
  • Dot plot and Chair Powell’s press conference will potentially swing the US Dollar in a significant way. A shift toward a dovish stance from Powell could cause downward pressure on Greenback.
  • Updated forecasts will also be key as they will give additional clues to investors on when the Fed will start cutting. As for now, the easing cycle odds are on a start in November.

DXY technical analysis: Bears make their move to reclaim ground

Indicators on the daily chart weakened on Wednesday with the Relative Strength Index (RSI) dropping below 50 and the Moving Average Convergence Divergence (MACD) flashing decreasing green bars.

The index also fell beneath the key support point of 104.50, amplifying the bearish perspective as it now trades below the 20, 100 and 200-day Simple Moving Average (SMA).

 

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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