US Dollar steady as dust settles over recent CPI shocker
- The US Dollar trades around a three-month high.
- Market is trying to digest the recent US CPI report which messed up the expected time table on Fed rate cuts.
- The US Dollar Index seems to be stalling ahead of 105 and seeing some profit taking.
The US Dollar (USD) is throwing a few good punches at the markets with a substantial rally midweek. The move comes on the back of surprise upticks in US monthly inflation (both headline and core). This in turn is triggering an earthquake in markets, which has sent equities nosediving, yields soaring and the US Dollar rallying against every major currency peer.
On the economic data front, a very light calendar offers room for markets to digest and recalibrate. Do not expect much from any single economic data point ahead this Wednesday with the Mortgage Applications Survey. Rather look for clues from US Federal Reserve members Austan Goolsbee and Michael Barr, who are speaking today and could soften the current inflation print with a nuanced message.
Daily digest market movers: CPI is done, time to look forward
- Goldman Sachs was quite quick to come out with a report in the US Consumer Price Index (CPI) aftermath saying that the February numbers will be substantially lower and writing off the current knee jerk reaction in CPI numbers due to the intensive seasonal holiday period over December and January. A mere drop on a hot plate thus, according to Goldman Sachs.
- North Korea has fired multiple cruise missiles off the East Coast.
- The weekly Mortgage Applications Index went into contraction by 2.3%, coming from a positive 3.7% previous week.
- Two US Federal Reserve speakers are set to make comments this Wednesday: Around 14:30 GMTChicago Fed Austan Gooldsbee, and later near 21:00, Fed’s Vice Chairman Michael Barr will speak.
- Equity markets are trying to recover with European equities mildly in the green. US equity futures are even more up than European ones, with the Nasdaq leading the charge, up 0.50%.
- The CME Group’s FedWatch Tool is now looking at the March 20th meeting. Expectations for a pause are 91.5%, while 8.5% for a rate cut. In terms of overweight expectations for a rate cut, the dial has moved from May/June now into summer towards July.
- The benchmark 10-year US Treasury Note trades near 4.30%, a touch softer from its peak on tuesday at 4.33%.
US Dollar Index Technical Analysis: tweaking the settings
The US Dollar Index (DXY) soared to a near 105 after US CPI data. Although it looks very logical that the DXY could jump above that level now, markets have already incorporated the data after pushing back rate-cut expectations for the Fed from June to July. It is possible, therefore, that in the coming days this up move will start to fade back in search of support.
The road is now open for a jump to 105.00 with 105.12 as key levels to keep an eye on. One step beyond there comes in at 105.88, the high of November 2023. Ultimately, 107.20 – the high of 2023 – could even come back into scope, but that would be when several inflation measures are coming in higher than expected for several weeks in a row.
Support should now be provided by the high of last week Monday near 104.59. Further down that 100-day Simple Moving Average looks rather doubtful, near 104.24, so the 200-day SMA near 103.67 looks more solid. Should that give way, look for support from the 55-day SMA near 103.08.
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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