US Dollar turns down despite hot CPI
- The US Dollar Index jumped after January CPI data surprises to the upside, fueling expectations of higher rates for a longer period, but then reversed its course.
- Federal Reserve Chair Jerome Powell avoids giving clues on rate cuts, reinforcing a cautious outlook for monetary policy.
- US Treasury yields rise as markets digest stronger inflation and Powell's testimony on Capitol Hill.
The US Dollar Index (DXY), which measures the value of the US Dollar (USD) against a basket of currencies, initially climbed after January’s hotter-than-expected Consumer Price Index (CPI) data but then reversed course. Inflation exceeded forecasts, leading investors to reassess the Federal Reserve’s (Fed) policy path. While Fed Chair Jerome Powell remained non-committal on future rate cuts, Treasury yields moved higher, supporting the DXY in the early American session, but it then retreated below 107.90.
Daily digest market movers: US Dollar down as CPI surprises, Powell remains cautious
- January CPI came in higher than expected, reinforcing concerns that inflation may remain sticky for longer. Headline CPI rose 0.5% MoM in January, beating the 0.3% forecast and accelerating from 0.4% in December.
- Core CPI jumped 0.4% MoM, surpassing expectations of 0.3%, compared to 0.2% in the previous month.
- Treasury yields climb as markets reassess the Federal Reserve's policy stance following stronger inflation data.
- Jerome Powell’s second day of testimony on Capitol Hill provided no new signals on the timing of rate cuts.
- Powell reaffirmed the Fed’s independence and rejected any political pressure to alter policy direction.
- The Fed chair stated that inflation progress has slowed, but the 2% target remains the central bank’s priority. He emphasized that monetary policy rules should serve as a guideline, not a strict rule for decision-making.
- Markets are pricing in fewer rate cuts for 2025 after the latest inflation data and Powell’s comments, which might benefit the USD.
- The CME FedWatch Tool now shows a reduced probability of a rate cut in May following the CPI report.
- Investors shift focus to upcoming Retail Sales and Producer Price Index (PPI) data for further inflation insights.
DXY technical outlook: Struggles to hold 108.50 as bearish signals persist
The US Dollar Index attempted to break higher but faces resistance at 108.50, struggling to reclaim the 20-day Simple Moving Average (SMA). The Relative Strength Index (RSI) remains below 50, signaling weak momentum. The Moving Average Convergence Divergence (MACD) histogram continues to show bearish traction.
Immediate support lies at 108.00, followed by the key psychological level at 107.50. A sustained move above 108.50 could open the door to 109.00, but selling pressure remains evident.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named 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 during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
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